PROFESSIONAL PROGRAMME - ICSI€¦ · 1 PP–ACLP–December 2019 PROFESSIONAL PROGRAMME...

GUIDELINE ANSWERS

PROFESSIONAL PROGRAMME

DECEMBER 2019

MODULE 1

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These answers have been written by competent personsand the Institute hope that the GUIDELINE ANSWERS willassist the students in preparing for the Institute'sexaminations. It is, however, to be noted that the answersare to be treated as model answers and not as exhaustiveand the Institute is not in any way responsible for thecorrectness or otherwise of the answers compiled andpublished herein.

C O N T E N T S Page

MODULE 1

1. Advanced Company Law and Practice 1

2. Secretarial Audit, Compliance Managementand Due Diligence 30

3. Corporate Restructuring, Valuation and Insolvency 53

The Guideline Answers contain the information based on theLaws/Rules applicable at the time of preparation. However,students are expected to be well versed with the amendmentsin the Laws/Rules made upto six months prior to the date ofexamination.

1 PP–ACLP–December 2019

PROFESSIONAL PROGRAMME EXAMINATION

DECEMBER 2019

ADVANCED COMPANY LAW AND PRACTICE

Time allowed : 3 hours Maximum marks : 100

NOTE : 1. Answer ALL Questions.

2. All references to sections relate to the Companies Act, 2013 unless statedotherwise.

1

Question 1

(a) The Board of Directors of ABC Ltd. has agreed in principle to grant loan of ` 6crores to XYZ Ltd. :

ABC Ltd. has provided the following information :

Authorised Share Capital ` 15 crores

Paid up Share Capital ` 10 crores

Free Reserves ` 4 crores

Securities Premium Account ` 1 crore

ABC Ltd. has already given loan of ̀ 3 crores to another company namely PQRLtd. and has made investment of ` 2 crores in the shares of other companies.

What advice would you give to the Board of Directors of ABC Ltd. about theproposed loan to XYZ Ltd. in the light of provisions of the Companies Act, 2013and the rules made thereunder ? (5 marks)

(b) What is ‘‘Entrenchment’’ ? State the provisions of Companies Act, 2013 and therules made thereunder with regard to ‘‘Entrenchment’’. (5 marks)

(c) Draft a resolution for creation of security on the properties of the company infavour of the lenders, stating the authority, type of resolution and relevantprovisions of the Companies Act, 2013. (5 marks)

(d) Draft a resolution for reappointment of an independent director of a listed companyfor the second term of five years, stating the authority, type of resolution andrelevant provisions of the Companies Act, 2013. (5 marks)

Answer 1(a)

Section 186 (2) of the Companies Act, 2013 provides that, no company shall directlyor indirectly:

(a) give any loan to any person or other body corporate;

(b) give any guarantee or provide security in connection with a loan to any otherbody corporate or person; and

(c) acquire by way of subscription, purchase or otherwise, securities of any bodycorporate,

PP–ACLP–December 2019 2

exceeding 60% of its paid up share capital, free reserves and securities premium accountor 100% of its free reserves and securities premium account, whichever is more.

Section 186(3) of the Companies Act, 2013 provides that where the aggregate of theloans and investment so far made, the amount for which guarantee or security so farprovided to or in all other bodies corporate along with the investment, loan, guarantee orsecurity proposed to be made or given by the Board, exceed the limits specified undersection 186(2), no investment or loan shall be made or guarantee shall be given orsecurity shall be provided unless previously authorised by a special resolution passed ina general meeting.

In view of the above provisions, it is to determine that whether special resolution isrequired to be passed in the general meeting, before granting loan of ̀ 6 crores to XYZ Ltd.

A per section 186(2) of the Companies Act, 2013, the limits for the loan andinvestment will be the amount whichever is more of the following

(1) 60% of paid up share capital, free reserves and securities premium account =`9 crores

(2) 100% of free reserves and securities premium account = `5 crores

Hence, the limit will be `9 crores as for loans and investments made and to bemade being more of the following:

Since the company has already given loans of ̀ 3 crores and has made investmentof `2 crores in the shares of other companies and further agreed to grant loan, of `6crores to XYZ Ltd. will exceed limit of ̀ 9 crores, hence prior approval by special resolutionin the general meeting will be required to be passed by ABC Ltd in terms of Section186(3).

Further, in terms of Section 117(3)(a) of the Companies Act, 2013, the SpecialResolution so passed by ABC Ltd shall also be required to be filed with the MCA in Eform MGT-14 within 30 days of the passing of the said Special Resolution.

Answer 1(b)

The word 'entrenchment' is not defined under the Companies Act, 2013, but provisionsfor the same are contained in Section 5 of the Companies Act 2013 and Rule 10 of theCompanies (Incorporation) Rules, 2014.

As per the Oxford Dictionary 'entrenchment' means 'to apply additional legalsafeguards'. In legal sense it means addition of provisions which makes certain provisionsor regulations more difficult/ stringent or cumbersome by way of additional procedure orchecks and safeguards.

The articles of association of the company provides for regulations for managementand affairs of the company. It is a public document and shareholders are presumed tohave notice of the regulations of the articles of the company.

The entrenched clauses in the articles, shall not be in violation of or in contradictionwith express provisions of the Act and the memorandum of association of the companyand in terms of Section 6 of the Act, the said entrenched clauses shall be void andunenforceable if they are against the provisions of Act and memorandum.


The provisions of Section 5 of the Companies Act, 2013 and Rule 10 of the Companies(Incorporation) Rules (the Rules) can be discussed as under.

(1) Section 5(3) of the Companies Act, 2013, the articles may contain provisions forentrenchment to the effect that specified provisions of the articles may be alteredonly if conditions or procedures as that are more restrictive than those applicablein the case of a special resolution are met or complied with.

(2) Section 5(4) of the Companies Act, 2013, the above provisions of entrenchmentshall only be made either on formation of a company or by an amendment in thearticles agreed to by all the members of the company in the case of a privatecompany and by a special resolution in the case of a public company.

(3) Section 5(5) of the Companies Act 2013, where the articles contain provisionsfor entrenchment, whether made on formation or by amendment, the companyshall give notice to the Registrar of Companies (the Registrar) of such provisionsin such form and in such manner as may be prescribed.

(4) Rules 10 of the Companies (Incorporation) Rules, 2014, where the articles containthe provisions for entrenchment, the company shall give notice to the Registrarof such provisions in Form INC No. 32 (SPICe) as the case may be along-withthe fees as prescribed at the time of incorporation of the company or in the caseof the existing companies, the same shall be filed in Form No. MGT 14, within30 days from the date of entrenchment of the articles, along with the fees asprescribed.

Answer 1(c)

Authority : Shareholders

Type of resolution : Special Resolution

"Resolved that pursuant to the provisions of Section 180(l)(a) and other applicableprovisions, if any, of the Companies Act, 2013, as amended from time to time and theArticles of Association of the company, consent of the shareholders be and is herebyaccorded to the Board of Directors for creation of /security in any form or manner on themovable or immovable properties of the company whether tangible, intangible or otherwiseboth present and future of the whole or substantially the whole of the undertaking(s) ofthe Company in such form and manner as the Board of Directors may deem fit, in favourof such lenders from time to time, together with interest or further interest thereon,compound interest in the event of default, accumulated interest, liquidated damages, allother charges, expenses and costs payable by the company in respect of such borrowings,made by the Board in accordance with the authorizations given to it by the company,from time to time.

"Resolved further that for the purpose of giving effect to this Resolution, the Board ofDirectors be and are hereby authorised, subject to the applicable provisions of the Actand the Articles of Association of the Company, to negotiate and settle the terms andconditions of the securities, finalize and execute all agreements, deeds and documentsas may be necessary, desirable or expedient, settle any question, doubt or difficultiesthat may arise in this regard, do all such acts, deeds, things or matters, as they may intheir absolute discretion deem proper, necessary or desirable and to delegate all or any


of these powers to any Committee of Directors or to the Managing Director or Whole-time Director or any officer of the company. "

Answer 1(d)


Type of Resolution : Special Resolution

"Resolved that pursuant to the provisions of Section 149, Section 150 and Section152 read with Schedule IV and other applicable provisions, if any, of the Companies Act,2013 (the Act), as amended from time to time and the Companies (Appointment andQualifications of Directors) Rules, 2014, (the Rules) including any statutory modification(s)or re-enactments thereof for the time being in force, read with the applicable provisions ofthe Securities and Exchange Board of India (Listing Obligations and DisclosureRequirements) Regulations, 2015 (the Listing Regulations), the Articles of Association ofthe company and the recommendation of the Nomination and Remuneration Committeeof the Board and the Board of Directors, Mr.______ (DIN:00000000), who was appointedas an Independent Director and who holds the office of Independent Director upto theconclusion of this annual general meeting and who has submitted a declaration that hemeets the criteria for independence as provided in Section149(6) the Act and applicableRules of the Listing Regulations and in respect of whom the company has received anotice in writing from a member proposing his candidature for the office of the directorpursuant to Section 160 of the Act and being eligible and willing, be and is herebyreappointed as an Independent Director of the company not liable to retire by rotationand to hold office for a second term of five consecutive years on the Board of Directors ofthe company w.e.f._____ to hold office up to ___________..

"Resolved further that the Board of Directors of the company be and is herebyauthorised to do all acts, deeds and things including filings and take steps as maydeemed necessary, proper or expedient to give effect to this Resolution and mattersincidental thereto."

Attempt all parts of either Q. No. 2 or Q. No. 2AQuestion 2

(a) Write a short note on ‘AGILE’. (4 marks)(b) As per the last audited financial statements the borrowings of MNL Ltd. from

Banks is `90 crores. Advise the company on the provisions of the CompaniesAct, 2013 and the rules made thereunder regarding the vigil mechanism.

(4 marks)(c) Royal Ltd., an unlisted company is having issued and paid up share capital of

40,00,000 equity shares of ̀ 10 each. In the annual general meeting Mr. Karanholding 3,40,000 equity shares has appointed Mr. Mayur as his proxy. Also Mrs.Mona holding 85,000 equity shares has appointed Ms. Radha as her proxy. Inthe annual general meeting, both Mr. Mayur and Ms. Radha demand poll on aresolution. What Advice would you give to the Chairman of the meeting ?

(4 marks)(d) Ajit is a Director of PQR Ltd. The Board of Directors of the company is considering

a proposal for the purchase of its office premises for which is owned by Ajit byissuing fully paid equity shares as consideration. What advice would you give


to the Board of Directors keeping in view the provisions of the Companies Act ,2013 in respect of such transactions ? (4 marks)

OR (Alternate question to Q. No. 2)

Question 2A

(i) Mukund, Director of PLK Ltd. desires to resign as Director of the company.Advise Mukund on the provisions of the Companies Act, 2013 for resignation ofa Director and actions to be taken by the Director and the company. (4 marks)

(ii) Explain whether the following transactions will be considered as ‘deposits’ underthe relevant provisions of the Companies Act, 2013 and the Rules madethereunder:

(1) Prashant is Promoter and Managing Director of XYZ Ltd. an unlistedcompany. Prashant and his wife Meera have extended total unsecured loanof ̀ 80 lakhs to the company in pursuance of the stipulation by Bank for theloans extended.

(2) ABC Ltd. has received advance of ̀ 20 lakhs on 1st April, 2018 from GreatLtd. for supply of goods. The amount is outstanding till date but is subjectmatter of legal proceedings in the Court. (4 marks)

(iii) Liberty Ltd. is public company with 229 members as under :

No. of members

Directors and their relatives 12Employees 24Ex-Employees [shares were allotted whenthey were Employees] 28Others 165Total 229

The Board of Directors have resolved to convert the company into a privatecompany.What actions will be required to be taken by the Board of Director forreduction in the number of members as required under the Companies Act, 20l3and the rules made thereunder. (4 marks)

(iv) Briefly state the forms, registers and return prescribed under the Companies[Significant Beneficial Owners] Rules, 2018. (4 marks)

Answer 2(a)

The AGILE stand for “Application for Goods and Services tax identification number,employee state Insurance corporation registration plus Employee provident fundorganization registration”.

The Ministry of Corporate Affairs has vide Notification G.S.R.275(E) dated 29thMarch, 2019, inserted Rule 38A in the Companies (Incorporation) Rules, 2014 andintroduced E-form No.INC 35 (AGILE).

Now the application for incorporation of a company under Rule 38 in E-form No. INC-


32 (SPICE) shall be accompanied by E-form INC 35 (AGILE) containing an applicationfor registration of the following numbers, namely:

(1) Goods and Services Tax Identification Number (GSTIN) with effect from 31stMarch, 2019.

(2) Employees State Insurance Corporation Registration (ESIC) with effect from15th April, 2019.

(3) Employees Provident Fund Organisation Registration (EPFO) with effect from8th April, 2019.

Though, it is optional to apply for GSTIN/ Establishment code as issued by EPFO/Employer Code as issued by ESIC at the time of incorporating company, filing of INC-35form along with SPICE form is mandatory.

As per the FAQs on E-form No. INC 35 (AGILE) on MCA21, the director who hassigned the E-form No.32 (SPICE) should sign' the E-form No. INC 35(AGILE).Thus, bothSPICE Form and AGILE Form shall be signed by the same director.

Answer 2(b)

Section 177 (9) of the Companies Act, 2013 read with Rule 7 of the Companies(Meetings of the Board and its Powers) Rules, 2014 provides that every listed companyand the following class or classes of companies shall establish a vigil mechanism fordirectors and employees to report their genuine concern or grievances:

i) the companies which accept deposits from the public;

ii) the companies which have borrowed money from the banks and public financialinstitutions in excess of `50 crores.

Further, the companies which are required to constitute an audit committee shalloversee the vigil mechanism through the audit committee and if any of the members ofthe committee have a conflict of interest in a given case, they should rescue themselvesand others on the audit committee would deal with the matter on hand.

In case of other companies, the board of directors shall nominate a director to playthe role of audit committee for the purpose of vigil mechanism to whom other directorsand employees may report their concerns.

The vigil mechanism shall provide for adequate safeguards against victimisation ofthe directors and the employees who avail of the vigil mechanism and also provide fordirect access to the chairperson of the audit committee or the director nominated to playthe role of the audit committee as the case may be, in exceptional cases.

As the borrowings of MNL Ltd. are of `90 cores, more than the limit prescribed inRule 7 of the Rules as above, the company shall establish a vigil mechanism for directorsand employees to report their genuine concern or grievances and comply with the provisionsin regard thereto stated as above.

Answer 2(c)

As per Section 105 of the Companies Act, 2013, any member of a company is


entitled to attend and vote at a meeting of the company and shall also be entitled toappoint another person as a proxy to attend and vote at the meeting on his behalf. Theproxy shall not be entitled to speak at the meeting and shall not be entitled to voteexcept on a poll.

Further, Section 109 of the Companies Act, 2013 provides that before or on thedeclaration of the result of the voting on any resolution on show of hands, a poll may beordered to be taken by the Chairman of the meeting on his own motion and shall beordered to be taken by him on a demand made in that behalf:

(a) in the case a company having a share capital, by the members present inperson or by proxy, where allowed, and having not less than one-tenth of thetotal voting power or holding shares on which an aggregate sum of not less thanfive lakh rupees or such higher amount as may be prescribed has been paid-upand

(b) in the case of any other company, by any member or members present inperson or by proxy, where allowed, and having not less than one-tenth of thetotal voting power.

The demand for a poll may be withdrawn at any time by the persons who made thedemand.

A poll demanded for adjournment of the meeting or appointment of Chairman of themeeting shall be taken forthwith.

A poll demanded on any question other than adjournment of the meeting orappointment of Chairman shall be taken at such time, not being later than forty-eighthours from the time when the demand was made, as the Chairman of the meeting maydirect.

Where a poll is to be taken, the Chairman of the meeting shall appoint such numberof persons, as he deems necessary, to scrutinise the poll process and votes given onthe poll and to report thereon to him as provided in Rule 21 of the Companies (Managementand Administration) Rules, 2014.

The Chairman of the meeting shall have power to regulate the manner in which thepoll shall be taken.

The result of the poll shall be deemed to be the decision of the meeting on theresolution on which the poll was taken.

In view of the above provisions the Chairman will be advised as below:

(a) Mr. Mayur and Ms. Radha being proxy shall not be entitled to speak or vote onshow of hands but they can demand poll.

(b) Since the demand for poll made by Mr. Mayur and Ms. Radha as proxies, iscomplying with the requirements as above, the Chairman will have to arrangefor taking poll as demanded by Mr. Mayur and Ms. Radha within 48 hours asprovided.


Answer 2(d)

The provisions for restrictions on non-cash transactions involving directors arecontained in Section 192 of the Companies Act, 2013, which are discussed as under:

(1) No company shall enter into an arrangement by which:

(a) a director of the company or its holding, subsidiary or associate companyor a person connected with him acquires or is to acquire assets forconsideration other than cash, from the company; or

(b) the company acquires or is to acquire assets for consideration other thancash, from such director or person so connected, unless prior approval forsuch arrangement is accorded by a resolution of the company in generalmeeting and if the director or connected person is a director of its holdingcompany, approval shall also be required to be obtained by passing a resolutionin general meeting of the holding company.

(2) The notice for approval of the resolution by the company or holding company ingeneral meeting shall include the particulars of the arrangement along with thevalue of the assets involved in such arrangement duly calculated by a registeredvaluer.

(3) Any arrangement entered into by a company or its holding company incontravention of the provisions of this section shall be voidable at the instance ofthe company unless:

(a) the restitution of any money or other consideration which is the subjectmatter of the arrangement is no longer possible and the company has beenindemnified by any other person for any loss or damage caused to it; or

(b) Any rights are acquired bona fide for value and without notice of thecontravention of the provisions of this section by any other person.

In the present case, PQR Ltd intends to enter into an arrangement with its DirectorAjit, involving acquisition of Office premises against a consideration other than cashpayable by way of issuance of the company’s equity shares to Ajit. Accordingly, theBoard of Directors of PQR Ltd. is advised to convene the general meeting of the membersfor prior approval for the transaction and also follow the above provisions of Section 192of the Companies Act, 2013, for entering the proposed transaction with Ajit, Director ofthe company.

Since, the company is issuing shares to the Ajit, the Company is also required to incompliance with Section 62(1)(c ) of the Companies Act, 2013.

Answer 2A(i)

Section 168 of the Companies Act, 2013 read with Rule 15 and Rule 16 of theCompanies (Appointment and Qualification of Directors) Rules, 2014 provides that:

1. The director may resign from his office by giving notice in writing to the company.

2. The Board of Directors of the company shall on receipt of the notice of resignationfrom the director take note of the same.


3. The resignation shall be effective from the date on which the notice is receivedby the company or the date specified by the director in the notice whichever islater.

4. The Board shall place the fact of resignation by the director in the Directors'Report laid immediately following annual general meeting of the company.

5. The director who has resigned shall be liable even after his resignation for theoffenses which occurred during his tenure.

Rule 15 of the Companies (Appointment and Qualification of Directors) Rules, 2014provides that the company shall within 30 days of from the date of receipt of the notice ofresignation from a director intimate the Registrar in Form No. DIR 12 and post theinformation on its website, if any.

Rule 16 of the Companies (Appointment and Qualification of Directors) Rules, 2014that where a director resigns from his office, he may within a period of 30 days the dateof his resignation, forward to the Registrar a copy of his resignation along with reasons ofthe resignation in Form No. DIR 11, along-with the fees as prescribed.

Mr. Mukund will resign from his office by giving notice with reasons of resignation inwriting to the company and may file within 30 days of his resignation, Form No. DIR 11with Registrar.

Also, the Board of the PLK Ltd. shall file Form No. DIR 12 within 30 days of the dateof receipt of notice of resignation from Mr. Mukund.

Answer 2A(ii)

As per Section 2 (31) of the Companies Act 2013 "deposit includes any receipt ofmoney by way of deposit or loan or in any other form by a company, but does not includesuch categories of amount as may be prescribed in consultation with the Reserve Bankof India."

Further, in Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014deposit is defined to include any receipt of money by way of deposit or loan or in anyother form by a company except various categories of receipts specified therein.

(1) Rule (2)(1)(c)(xiii) Companies (Acceptance of Deposits) Rules, 2014 provided thatDeposit shall not include any amount brought in by promoters of the company byway of unsecured loan in pursuance of the stipulation of any lending financial institutionor a bank subject to fulfilment of the following conditions namely:(a) the loan is brought in pursuance of the stipulation imposed by the lending

institutions or banks on the promoter to contribute such finance(b) the loan is provided by the promoters themselves or by their relatives or by both

and(c) the exemption under this sub-clause shall be available only till the loans of

financial institutions or banks are repaid and not thereafter.

In view of the above provisions, the unsecured loan of `80 lakhs extended to thecompany by Prashant and his wife Meera shall not be considered deposits, till thetime the loans extended by the Bank are repaid but not thereafter.


(2) In Rule (2)(1)(c)(xii)(a) Companies (Acceptance of Deposits) Rules, 2014 providedthat Deposit shall not include any amount received in the course of, or for thepurposes of, the business of the company as an advance for the supply of goods orprovision of services accounted for in any manner whatsoever provided that suchadvance is appropriated against supply of goods or provision of services within aperiod of three hundred and sixty five days from the date of acceptance of suchadvance, provided further that in case of any advance which is subject matter ofany legal proceedings before any court of law, the said time limit of three hundredand sixty five days shall not apply.

In view of the above provisions, the advance of ` 20 lakhs received by ABC Ltdshall not be considered as deposit, even-though the amount is not appropriated within aperiod of three hundred and sixty five days, but as the same is subject matter of legalproceedings in the Court.

Answer 2A(iii)

As per the provisions of Section 2(68) of the Companies Act,2013 , a private companymeans a company, having a minimum paid up share capital as maybe prescribed andwhich by its articles:

(a) restricts the right to transfer of its shares

(b) except in case of one person company, limits the number of its members to twohundred, provided that:

(i) where two or more persons hold one or more shares in a company jointly,they shall be treated as a single person

(ii) persons who are in the employment of the company and persons who havingbeen in the employment of the company , were members of the companywhile in the employment and have continued to be members after theemployment ceased, shall not be included in the number of members

(c) prohibits any invitation to the public to subscribe for any securities of thecompany.

In view of the above provisions, for conversion of Liberty Ltd. into a private company,no actions for reduction of number of members will be required to be taken as 24employees and 28 ex-employees will be excluded for consideration of the limit of 200members. After excluding employees and exemployees, there will be 177 members asper the above provisions, which is well within the limits of 200 members as providedunder Section 2(68) of the Companies Act 2013.

Answer 2A(iv)

The Companies (Significant Beneficial Owners) Rules, 2018 are notified by Ministryof Corporate Affairs vide Notification No. GSR 561(E) dated 13 June, 2018 and furthersubstantially amended, vide Notification No. GSR 100(E) dated 8 February, 2019, theforms, registers, returns etc. prescribed under the Rules as amended from time to timeare briefly stated as below.

(1) Form No. BEN-l

Declaration by the beneficial owner who hold or acquires significant ownership


in the shares to be filed with the company under section 90(1) of the CompaniesAct read with Rule 3 of the Companies (Significant Beneficial Owners) Rules, 2018.

Form No. BEN-1 to the reporting company within ninety days from suchcommencement of the rule or within thirty days of acquiring such significantbeneficial ownership or any change therein.

(2) Form No. BEN-2

Return to be filed with the Registrar of Companies within a period of thirty daysby the company in respect of the declaration received under Section 90(4) of theCompanies Act, 2013 read with Rule 4 of the Companies (Significant BeneficialOwners) Rules, 2018.

(3) Form No. BEN-3

Register of beneficial owners holding significant beneficial interest to bemaintained by the company

[Pursuant to section 90(2) of the Companies Act, 2013 and rule 5 of the Companies(Significant Beneficial Owners) Rules, 2018.

(4) Form No. BEN-4

Notice to be issued by the company to any person for declaration of the significantbeneficial interest in the shares of the company.

Pursuant to section 90(5) of the Companies Act, 2013 and read with Rule 6 ofthe Companies (Significant Beneficial Owners) Rules, 2018.

Attempt all parts of either Q. No. 3 or Q. No. 3A

Question 3

(a) The Board of Directors of PQR Ltd. incorporated on 23rd January, 2019, havingpaid up equity share capital of ̀ 10 crores divided into 1,00,00,000 equity sharesof `10 each, have resolved to issue 20,00,000 equity shares of ̀ 10 each at theface value, as sweat equity shares to Makarand, Director for providing technicalknow-how.

Advise the Board of Directors on various steps to be taken with respect to theproposed transaction. (4 marks)

(b) Deep Ltd. declared dividend but failed to make payment to shareholders. Advisethe company about the consequences for such a default. Please also list outthe circumstances under which a company is not deemed to have committed anoffence with regard to non-payment of dividend. (4 marks)

(c) FGH Ltd. incorporated in 2015 and its financial year is ending 31st March. Thecompany had held its annual general meeting on 10th July, 2018. Thereafter thecompany has not held its annual general meeting till end of November, 2019.Manoj, a shareholder approaches you for guidance. Briefly discuss the provisionsof the Companies Act, 2013 and the rules made thereunder and advise Manojabout his rights in these circumstances. (4 marks)


(d) Dipen is Director in nine public limited companies, one dormant public limitedcompany and ten private limited companies. Dipen is invited by JKL Ltd. to joinas Director. Discuss the relevant provisions of the Companies Act, 2013 andadvise Dipen. (4 marks)


Question 3A

(i) Dinesh, Chartered Accountants is statutory auditors of PQR Ltd. MNP Ltd., asubsidiary company of PQR Ltd. propose to give assignment of actuarial servicesto Ramesh, Chartered Accountant, son of Dinesh. Advise MNP Ltd. about thelegality of the above proposal. (4 marks)

(ii) You are approached by the Board of Directors of KLM Ltd. for advise on theprocedure for variation of members’ rights under the Companies Act, 2013 andthe rules made thereunder. Advise the Board of Directors. (4 marks)

(iii) The Board of Directors of Williams Ltd. have resolved as under :

(i) Appoint Mohan as Alternate Director of Rakesh, Director. Mohan is alreadyappointed as Alternate Director to Prakash, Director.

(ii) Appoint Mitesh, a Director of the company as Alternate Director of Manoj,Director.

State the provisions of the Companies Act, 2013 and comment on the legalityof the above decisions of the Board of Directors. (4 marks)

(iv) Draft a resolution confirming the remuneration of cost auditors stating theauthority, type of resolution and relevant provisions of the Companies Act, 2013.

(4 marks)

Answer 3(a)

The following provisions of the Companies Act, 2013 and Companies (Share Capitaland Debentures) Rules, 2014 provide for issue of sweat equity shares by a company.

(1) As per Section 2(88) of the Companies Act, 2013, "sweat equity shares" meanssuch equity shares as are issued by a company to its directors or employees ata discount or for consideration, other than cash, for providing their know-how ormaking available rights in the nature of intellectual property rights or valueadditions, by whatever name called.

(2) As per Section 54 (1) of the Companies Act,2013, notwithstanding anythingcontained in Section 53 (prohibition on issue of shares at discount), a companymay issue sweat equity shares of a class of shares already issued, if the followingconditions are fulfilled, namely:

(a) the issue is authorised by a special resolution passed by the company

(b) the resolution specifies the number of shares, the current market price,consideration, if any, and the class or classes of directors or employees towhom such equity shares are to be issued


(c) where the equity shares of the company are listed on a recognised stockexchange, the sweat equity shares are issued in accordance with theregulations made by the Securities and Exchange Board of India in thisbehalf and if they are not so listed, the sweat equity shares are issued inaccordance with such rules as may be prescribed.

(3) As per Section 54(2) of the Companies Act, 2013, the rights, limitations,restrictions and provisions as are for the time being applicable to equity sharesshall be applicable to the sweat equity shares issued under this section and theholders of such shares shall rank pari passu with other equity shareholders.

(4) As per Rule 8 of the Companies (Share Capital and Debentures) Rules, 2014:

(i) the company shall not issue the sweat equity shares for more than 15% ofthe of the existing paid up equity share capital in a year or shares of theissue value of `5 crores whichever is higher, provided that issue of sweatequity shares shall not exceed 25% of the paid up equity capital of thecompany at any time.

(ii) the special resolution authorizing the issue of sweat equity shares shall bevalid for making the allotment within a period of not more than twelve monthsfrom the date of passing of the special resolution.

(iii) the sweat equity shares issued to directors or employees shall be lockedin/non-transferable for a period of three years from the date of allotment andthe fact that the share certificates are under lock-in and the period of expiryof lock in shall be stamped in bold or mentioned in any other prominentmanner on the share certificate.

(iv) the sweat equity shares to be issued shall be valued at a price determinedby a registered valuer as the fair price giving justification for such valuation.

(v) the valuation of intellectual property rights or of know how or value additionsfor which sweat equity shares are to be issued, shall be carried out by aregistered valuer, who shall provide a proper report addressed to the Boardof directors with justification for such valuation

In view of the above referred provisions of the Companies Act, 2013 and theCompanies (Share Capital and Debentures) Rules, 2014, after passing the specialresolution of the members in the general meeting and ensuring other compliancesreferred above, 20,00,000 equity shares of ̀ 10 each at the face value i.e. at thepaid-up value of ̀ 2 crores can be issued, by the Board of Directors of PQR Ltd.,as sweat equity shares to Mr. Makarand, Director for providing technical know-how.

Answer 3(b)

The provisions for punishment for failure to distribute dividends provided in Section127 of the Companies Act, 2013 are discussed as below:

(1) As provided in Section 127 of the Companies Act, 2013, where a dividend hasbeen declared by a company but has not been paid or the warrant in respectthereof has not been posted within thirty days from the date of declaration to


any shareholder entitled to the payment of the dividend, every director of thecompany shall, if he is knowingly a party to the default, be punishable withimprisonment which may extend to two years and with fine which shall not beless than one thousand rupees for every day during which such default continuesand the company shall be liable to pay simple interest at the rate of eighteen percent. per annum during the period for which such default continues.

(2) As provided in Section 127 of the Companies Act, 2013 no offence under thissection shall be deemed to have been committed:

(a) where the dividend could not be paid by reason of the operation of any law

(b) where a shareholder has given directions to the company regarding thepayment of the dividend and those directions cannot be complied with andthe same has been communicated to him

(c) where there is a dispute regarding the right to receive the dividend;

(d) where the dividend has been lawfully adjusted by the company against anysum due to it from the shareholder or

(e) where, for any other reason, the failure to pay the dividend or to post thewarrant within the period under this section was not due to any default onthe part of the company.

Answer 3(c)

The provisions of Section 96 and Section 97 the Companies Act, 2013 and Rule 74of the National Company Law Tribunal Rules, 2016 providing for holding of the annualgeneral meeting and application to the National Company Law Tribunal (the Tribunal) arediscussed as under:

(1) As per Section 96 (1) of the Companies Act, 2013, every company other than aone person company shall in each year hold in addition to any other meetings,a general meeting as its annual general meeting and shall specify the meetingas such in the notice calling it and not more than fifteen months shall elapsebetween the date of one annual general meeting of the company and that of thenext.

(2) It is provided in Section 96 (1) of the Companies Act, 2013 that in case of the firstannual general meeting, it shall be held within a period of nine months from thedate of closing of the first financial year of the company and in any other casewithin a period of six months from the date of closing of the financial year.

(3) It is also provided in Third Proviso to Section 96(1) of the Companies Act, 2013that the Registrar of Companies may, for any special reason, extend the timewithin which the annual general meeting, other than the first annual generalmeeting, by a period not exceeding three months.

(4) As provided in Section 97 of the Companies Act, 2013,

(a) if any default is made in holding an annual general meeting of a companyunder Section 96 of the Companies Act, 2013, the National Company LawTribunal (the Tribunal) may, notwithstanding anything contained in the Act or


the articles of association of the company, on the application of any memberof the company, call or direct the calling of an annual general meeting of thecompany and give such ancillary or consequential directions as the Tribunalthink expedient

(b) the direction may include a direction that one member of the company presentin person or by proxy shall be deemed to constitute a meeting.

(c) a general meeting held in pursuance of the directions of the Tribunal asaforesaid, shall , subject to any directions of the Tribunal, be deemed to bean annual general meeting of the company under the Act.

(3) As provided in Rule 74 of the National Company Law Tribunal Rules, 2016

(a) an application under Section 97 Companies Act,2013 for calling or obtaininga direction to call the annual general meeting of the company shall be madeby any member of the company in Form No. NCLT 1 and shall beaccompanied by the documents specified in Annexure-B i.e.

(i) affidavit verifying the petition

(ii) bank draft evidencing payment of application fees and

(iii) any other relevant documents

(b) a copy of the application shall be served on the Registrar of Companies onor before the date of hearing.

It is not stated in the question and therefore it is presumed that FGH Ltd. has notobtained any extension of time from Registrar of Companies for holding the annual generalmeeting under 3rd proviso to Section 96(1) of Companies Act, 2013. As the company hasnot convened annual general meeting in 2019 within six months of the close of thefinancial year i.e. by 30th September, 2019 and more than fifteen months' time haselapsed from the date of the last annual general meeting convened on 10th July, 2018.Mr. Manoj may choose to file application before the Bench of Tribunal as above in FormNo. NCLT-1 for seeking directions for calling the annual general meeting and otherappropriate directions under section 97.

Answer 3(d)

The following provisions are contained in Section 165 of the Companies Act, 2013 fornumber of directorships a person can hold in companies.

(1) As per Section 165 (1) of the Companies Act, 2013, after commencement of theAct, no person shall hold office of a director, including any alternate directorshipin more than twenty companies at the same time, Provided that maximumnumber of public companies in which a person can be appointed shall not exceedten.

(2) As per the explanations provided in Section 165(1) of the Companies Act, 2013:

(i) for reckoning the limit of public limited companies in which a person can beappointed as director, the directorship in private companies that are eitherholding or subsidiary company of a public company shall be included.


(ii) for reckoning the limit of directorships in twenty companies , the directorship ina dormant company shall not be included.

In view of the above provisions of Section 165(1) of the Companies Act, 2013 forcalculating the directorships held by Mr. Dipen, the directorship held in 1 dormant publiclimited company shall be excluded.

Therefore Mr. Dipen can accept the invitation of JKL Ltd. for directorship and afterappointment in JKL Ltd., the directorships held by Mr. Dipen will be within the overallprescribed limit of 20 companies (including not more than 10 Public companies) asindicated under:

1. 10 public limited companies

2. 1 dormant public limited company (excluded from the limit as above)

3. 10 private companies

Answer 3A(i)

As per the provisions of Section 144 of the Companies Act, 2013:

(1) An auditor appointed under the Act shall provide to the company only such otherservices as are approved by the board of directors or the audit committee, as thecase may be, but which shall not include any of the following services whethersuch services are rendered directly or indirectly to the company or its holdingcompany or subsidiary company

(a) accounting and book keeping services

(b) internal audit

(c) design and implementation' of any financial information system

(d) actuarial services

(e) investment advisory services

(f) investment banking services

(g) rendering of outsourced financial services

(h) management services

(i) other kind of services as may be prescribed

In the explanations to Section 144 of the Companies Act, 2013, it is provided that theterm' directly or indirectly' shall include rendering of the services by the auditor:

(a) in case of auditor being an individual, either himself or through his relative or anyother person connected or associated with such individual or through any othersuch entity, whatsoever, in which such individual has significant influence orcontrol or whose name, trade name or brand is used by such individual

(b) in case of the auditor being a firm, either by itself or through any of its partnersor through its parent, subsidiary or associate entity or through any other entity,


whatsoever, in which the firm or any partner of the firm has significant influenceor control or whose name, trade name or brand is used by the firm or any of itspartners.

In view of the above provisions, giving of assignment of actuarial services to Mr.Ramesh, son of Mr. Dinesh by MNP Ltd. will be violation of the provisions of Section 144of the Companies Act, 2013 as:

(i) the actuarial services cannot be provided by an auditor; and

(ii) providing of the said services by Mr. Ramesh to MNP Ltd. will mean providingservices indirectly by Mr. Dinesh to the subsidiary company of PQR Ltd. ofwhich he is auditor.

Answer 3A(ii)

(1) As per Section 48(1) of the Companies Act, 2013, where the share capital of thecompany is divided into different classes of shares, the rights attached to theshares of any class may be varied; (i) with the consent in writing of the holdersof not less than three-fourth of the issued shares of that class or (ii) by passingspecial resolution at the separate meeting of the holders of the issued shares ofthat class:

(a) if provision with respect to such variation is made in the memorandum orarticles of the company; or

(b) in absence of such provision in the memorandum or articles if such variationis not by the terms of issue of the shares of that class.

(2) As provided in Section 48(1) of the Companies Act, 2013, if variation by oneclass of shareholder affects the rights of any other class of shareholders, theconsent of three-fourth of such other class of shareholders shall also be obtainedand the provisions of this section shall apply to such variation.

(3) As per Section 48(2) of the Companies Act, 2013, if the holders of not less than10% of the issued shares of a class did not consent to such variation or vote infavour of the variation may apply to the National Company Law Tribunal (theTribunal) to have the variation cancelled and where such application is made,variation shall not have effect unless and until confirmed by the Tribunal.

(4) As provided in Section 48(2) of the Companies Act, 2013, an application underthis section shall be made within 21 days after the date on which the consentwas given or the resolution was passed as the case may be and may be madeon behalf of the shareholders entitled to make the application by such one ormore of their number as they may appoint in writing for the purpose.

(5) As provided in Section 48(3) of the Companies Act, 2013, the decision of theTribunal on any application filed as above shall be binding on the shareholders.

(6) As provided in Section 48(4) of the Companies Act, 2013, the company shall filewith the Registrar of Companies, the copy of the order of the Tribunal within 30days of the date of the order.

(7) As provided in Section 48(5) of the Companies Act, 2013, where any default ismade in complying with the provisions of this section, the company shall be


punishable with fine which shall not be less than twenty-five thousand rupeesbut which may extend to five lakh rupees and every officer of the company whois in default shall be punishable with imprisonment for a term which may extendto six months or with fine which shall not be less than twenty-five thousandrupees but which may extend to five lakh rupees, or with both.

(8) The application before the Tribunal shall be filed under Rule 68A of the NationalCompany Law Tribunal Rules, 2016 in Form No. NCLT-1 and the applicants shallcomply with the provisions made and the requirements specified.

Answer 3A(iii)

The provisions contained in Section 161 (2) of the Companies Act, 2013 for appointmentof alternate director are discussed as under:

(1) the Board of a company may, if so authorised by its articles or by a resolutionpassed by the company in the general meeting, appoint a person, not being aperson holding any alternate directorship for any other person in the company,or holding directorship in the same company, to act as an alternate director for adirector during his absence for a period of not less than three months from India.

(2) no person shall be appointed as an alternate director for an independent directorunless he is qualified to be appointed as an independent director under theprovisions of the Act.

(3) an alternate director shall not hold office for a period longer than permissible tothe directors in whose place he has been appointed and shall vacate the office ifand when the director in whose place he has been appointed returns to India

(4) if the term of office of the original director is determined before he so returns toIndia, any provision for the automatic re-appointment of retiring director in thedefault of another appointment shall apply to the original director and not to thealternate director.

In view of the above it can be stated that the above decisions of the Board of Directorsare not in conformity with the provisions of Section 161(2) of the Companies Act, 2013as:

(i) Mr. Mohan is already appointed as Alternate Director to Mr. Prakash, Directorand therefore Mr. Mohan cannot be appointed as Alternate Director of Mr. Rakesh,another Director in the same company.

(ii) Mr. Mitesh, is Director of the company and therefore cannot be appointed asAlternate Director of Mr. Manoj another Director in the same company.

Answer 3A(iv)


Type of Resolution: Ordinary Resolution

"Resolved that pursuant to the provisions of Section 148 (3) and other applicableprovisions, if any, of the Companies Act,2013 and the Companies(Audit and Auditors)Rules, 2014 (including any statutory modification(s) or re-enactment(s) thereof for the


time being in force), the remuneration of `2,50,000/-plus applicable taxes and out ofpocket expenses, as recommended by the Audit Committee and approved by the Boardof Directors of the company, payable to M/s ABC & Associates, Cost Accountants (FirmRegistrationNo.000202) as Cost Auditors to conduct the audit of the relevant cost recordsof the company for the financial year 2019-20 ending 31st March,2020 be and is herebyratified and confirmed.

Resolved further that the Mr. X Director of the Company be and is hereby authorisedto do all acts, deeds and things including filings as may be required and to take steps asmay deemed necessary, proper or expedient to give effect to this Resolution and mattersincidental thereto"

Question 4

(a) Ms. Monica is a director elected by small shareholders of PLQ Ltd. She hasapproached you for advice on the following :

(i) Whether a director elected by small shareholders is eligible to be appointedas independent director ?

(ii) What is the tenure of a director elected by small shareholders ?(iii) Can a director elected by small shareholders be associated with the company

after completion of the tenure of his/her office ?(iv) Can a director elected by small shareholders be appointed in similar capacity

in three or more companies ?

What advice would you give her ? (4 marks)

(b) Ratanlal, a member of Rajratna Ltd. has given notice to the company forinspection of the contract of service with Manohar, Managing Director. Advisethe company. (4 marks)

(c) Draft a resolution for keeping and maintaining the registers of members anddebentureholders with index and other statutory registers at the place other thanthe registered office of the company, stating the authority, type of resolution andthe relevant provisions of the Companies Act, 2013. (4 marks)

(d) State the provisions of the UK Companies Act, 2006 for keeping of Register ofSecretaries. (4 marks)

Answer 4(a)

The provisions in respect of appointment of director elected by small shareholders(the small shareholder' director) are contained in Section 151 of the Companies Act,2013 and Rule 7 of the Companies (Appointment and Qualification of Directors) Rules,2014 .In view of the provisions of Section 151 of the Act and Rule 7 of the Rules, Ms.Monika will be advised as under:

(i) As provided in Rule 7(4) of the Companies (Appointment and Qualification ofDirectors) Rules, 2014, the small shareholder' director shall be considered as anindependent director subject to his being eligible under Section149 (6) of theCompanies Act 2013, and his giving a declaration of his independence of hisindependence as per Section 149 (7) of the Companies Act, 2013.


Thus the small shareholder' director can be considered as independent directoronly if he is eligible under Section 149 (6) of the Companies Act, 2013 and giveshis declaration under Section149 (7) Companies Act, 2013.

(ii) As provided in Rule 7(5) of the Companies (Appointment and Qualification ofDirectors) Rules, 2014, the appointment of small shareholders' director shall besubject to the provisions of Section 152 of the Act except that:

(i) such director shall not be liable to retire by rotation

(ii) such director's tenure as small shareholders' director shall not exceed aperiod of 3 consecutive years and

(iii) on the expiry of the tenure, such director shall not be eligible forreappointment.

Thus the tenure of the small shareholders' director shall not be more than3consecutive years and cannot be reappointed.

(iii) As per Rule 7 (9) of the Companies (Appointment and Qualification of Directors)Rules, 2014, a small shareholders' director shall not, for a period of three yearsfrom the date on which he ceases to hold office as a small shareholders' directorin a company, be appointed or be associated with such company in any othercapacity, directly or indirectly.

Thus, after ceasing as the small shareholders' director he cannot, be appointedor be associated with such company in any other capacity, directly or indirectlyfor 3 years.

(iv) As per Rule 7 (8) of the Companies (Appointment and Qualification of Directors)Rules, 2014, no person shall hold the position of small shareholders' director inmore than two companies at a time. It is also provided that the second companyin which he has been appointed shall not be in a business which is competing oris in conflict with the business of the first company.

Thus, a person cannot be small shareholders' director in 3 companies.

Ms. Monica will be advised accordingly on queries as above.

Answer 4(b)

The provisions regarding keeping of the copies of the contract of employment withmanaging director or whole-time director and inspection thereof by members as containedin Section 190 of the Companies Act, 2013 are stated as below.

As per Section 190 (1) of the Companies Act, 2013, every company shall keep at itsregistered office:

a) where a contract of service with the managing director or whole-time director inwriting a copy of the contract or

b) where such contract is not in writing, a written memorandum setting out itsterms.

As per Section 190 (2) of the Companies Act, 2013, the copies of the contract or the


memorandum kept under sub-clause (1) shall be open for inspection by any member ofthe company without payment of fees.

As per Section 190 (3) of the Companies Act, 2013, if any default is made in complyingwith the provisions of sub-section (1) or sub-section (2), the company shall be liable to apenalty of twenty-five thousand rupees and every office of the company who is in defaultshall be liable to a penalty of five thousand rupees for each default.

As per Section 190(4) of the Companies Act, 2013, the provisions of this sectionshall not apply to a private company.

In view of the above provisions, Mr. Ratanlal , a member of Rajratna Ltd. has right toinspect the copies of the contract of service or memorandum setting out terms ofemployment of Mr. Manohar Managing Director. If Mr. Ratanlal is not allowed inspection,the company and every officer will be liable to penalty as prescribed in Section 190 (3) ofthe Companies Act, 2013. The company management will be advised to allow Mr. Ratanlalinspection of the copy of contract of service of Mr. Manhar, Managing Director.

Answer 4(c)

Authority: Shareholders

Type of Resolution: Special Resolution

"Resolved that pursuant to Section 94 and other applicable provisions, if any, of theCompanies Act,2013 as amended from time to time and Companies (Management andAdministration) Rules, 2014 (including any statutory modification or amendment theretoor re-enactment thereof for the time being in force), the consent of the shareholders ofthe company be and is hereby accorded to keep and maintain the register of members,the register of debenture-holders, the index of members/debenture-holders, other statutoryregisters and the copies of all annual returns and copies of certificates and documentsrequired to be annexed thereto at the company's corporate office at A-304, MK Complex,Anand vihar, New Delhi, w.e.f. – (PIN Code), being a place in India in which more thanone-tenth of the total number of members entered in the register of members residew.e.f. 1st December,2019, instead of the registered office of the company.

Resolved further that the Board of Directors be and are hereby authorised to do allacts, deeds and things including filings and take steps as may deemed necessary,proper or expedient to give effect to this Resolution and matters incidental thereto."

Answer 4(d)

The following provisions are contained in Section 275 and Section 276 of the UKCompanies Act, 2006 in respect of register of secretaries.

(A) As per Section 275 (Duty to keep register of secretaries)

(1) A company must keep a register of its secretaries.

(2) The register must contain the required particulars of the person who is orpersons who are, the secretary or joint secretaries of the company.

(3) The register must be kept available for inspection:

- at the company's registered office, or


- at a place specified in the regulations

(4) The company must give notice to the registrar-

- of the place at which the register is kept available for inspection and

- of any change in that place,

unless it has at all times been kept at the company's registered office.

(5) The register must be open to the inspection.

- of any member of the company without charge and

- of any other person on payment of such fee as may be prescribed.

(B) As per Section 276(Duty to notify registrar of changes)

(1) A company must, within the period of 14 days from:

- a person becoming or ceasing to be its secretary or one of its jointsecretaries, or

- the occurrence of any change in the particulars contained in its registerof secretaries, give notice to the registrar of the change and of the dateon which it occurred.

(2) The Notice of a person having become secretary or one of the joint secretaries,of the company must be accompanied by a consent of that person to act inthe relevant capacity.

(3) If default is made in complying with this section, an offence is committed byevery officer of the company who is in default.

For this purpose a shadow director is treated as an officer of the company.

(4) A person guilty of an offence under this Section is liable on summary convictionto a fine not exceeding level 5 on the standard scale and for continuedcontravention, a daily default fine not exceeding one-tenth of level 5on thestandard scale.

Question 5

(a) The Board of Directors of X Ltd.—an unlisted company—having turnover of `250 as per the last audited financial statements approach for your advice forconstitution, composition and functions and powers of the Nomination andRemuneration Committee. Advise X Ltd. (8 marks)

(b) The Board of Directors of ABC Ltd. approaches you for advice on the voluntaryrevision of financial statements or board reports of the company as per theCompanies Act, 2013. Advise the Board of Directors. (8 marks)

Answer 5(a)

The provisions of Section 178 of the Companies Act, 2013 and Rule 6 of Companies(Meetings of Board and its Powers) Rules, 2014 providing for the constitution, composition,


functions and powers of the Nomination and Remuneration Committee are discussedbelow:

As per Section 178 (1) of the Companies Act, 2013, the Board of Directors of everylisted public company and such other classes of companies as may be prescribed shallconstitute of the Nomination and Remuneration Committee (the Committee),consistingof three or more non-executive directors out of which not less than one half shall beindependent directors. Further the chairperson of the company (whether executive ornon-executive) may be appointed as member of Committee but shall not chair thecommittee.

As per Section 178 (2) of the Companies Act, 2013, the Committee shall identifypersons who are qualified to become directors and who may be appointed in seniormanagement in accordance with criteria laid down and recommend to the Board for theirappointment and removal and shall specify the manner for effective evaluation ofperformance of Board, its committees and individual directors to be carried out either bythe Board, by the Committee or by an independent external agency and review itsimplementation and compliance.

As per Section 178 (3) of the Companies Act, 2013, the Committee shall formulatethe criteria for determining qualifications, positive attributes ad independence of a directorand recommend to the Board a policy relating to the remuneration for the directors, keymanagerial personnel and other employees.

As per Section 178 (4) of the Companies Act, 2013, the Committee shall ensure thefollowing while formulating the above policy.

• the level and composition of the remuneration is reasonable and sufficient toattract, retain and motivate directors of the quality required to run the companysuccessfully.

• relationship of remuneration to performance is clear and meets appropriateperformance bench-marks .

• remuneration to directors, key managerial personnel and senior managementinvolves a balance between fixed incentive pay reflecting short and long termperformance objectives appropriate to the working of the company and its goals.

The policy shall be placed on the website of the company, if any, and the salientfeatures of the policy and changes therein, if any, along-with the web address of thepolicy, if any, shall be disclosed in the Board of Directors' Report.

As per Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014,every listed public company and a company covered under Rule 4 of the Companies(Appointment and Qualification of Directors) Rules, 2014 shall constitute an AuditCommittee and the a 'Nomination and Remuneration Committee of the Board.

According to Rule 4 (1) of the Companies (Appointment and Qualification of Directors)Rules, 2014, following classes of companies are provided therefore they shall constitutethe Committee.

• all public companies with a paid - up capital of `10 crores or more or

• all public companies having turnover of `100 crores or more or


• all public companies, having in aggregate, outstanding loans or borrowings ordebentures or deposits exceeding ̀ 50 Crores or more.

In the above Rule 4 (1) of the Companies (Appointment and Qualification of Directors)Rules the following provisions and explanations are provided, the paid up share capitalor turnover or outstanding loans, or debentures or deposits, as the case may be, asexisting on the date of last audited Financial Statements shall be taken into account forthe purposes of this rule.

Where a company ceases to fulfil any of the three conditions laid down above forthree consecutive years, it shall not be required to comply with these provisions untilsuch time as it meets any of such conditions.

As per Rule 4(2) of the Companies (Appointment and Qualification of Directors)Rules, the following classes of unlisted public companies shall not be covered underRule 4(1):

• a joint venture;

• a wholly owned subsidiary;

• a dormant company defined under Section 455 of the Act.

Considering that the Turnover of X Ltd as per its last audited financial Statement is`250 only i.e. below the prescribed threshold/ limits discussed above, the Board ofDirectors of X Ltd. is not required to constitute Nomination & Remuneration Committee.

Alternate Answer with Assumption of Turnover of ̀ 250 crore.

The Board of Directors of X Ltd. will be advised to follow the above provisions of theCompanies Act, 2013 and Rule 6 of Companies (Meetings of Board and its Powers)Rules, 2014 for constitution, composition and functions and powers of the Nominationand Remuneration Committee.

Answer 5(b)

The provisions as contained in Section 131 of the Companies Act, 2013 and Rule 77of the National Company Law Tribunal Rules, 2016 for voluntary revision of financialstatements or board reports of the company, are discussed below:

As provided in Section 131(1) of the Companies Act, 2013, if it appears to thedirectors of the company that -

a) the financial statements of the company or

b) the report of the Board

do not comply with the provisions of Section 129 (financial statements) or Section 134(financial statements, Board's report etc.)of the Companies Act, 2013, they may preparerevised financial statements or a revised report in respect of any of three precedingfinancial years after obtaining the approval of National Company Law Tribunal (theTribunal) on an application made by the company in such form and in such manner asmay be prescribed and a copy of the order passed by the Tribunal shall be filed with theRegistrar.


The Tribunal shall, before passing any order, give notice to the Central Governmentand the income-tax authorities and shall take into consideration, the representationsmade if any, by the government or the authorities.

Such revised financial statement or report shall not be prepared of filed more thanonce in a financial year. The detailed reasons for revision of such financial statement orreport shall be also be disclosed in the Board's report in the relevant financial year inwhich such revision has been made.

As provided in Section 131(2) of the Companies Act, 2013, where the copies of theprevious financial statement or report has been sent out to the members or delivered tothe Registrar or laid before the general meeting of the company, the revision must beconfined to:

a) the correction in respect of which the previous financial statement or report donot comply with the provisions of Section 129 or Section 134;and

b) the making of any consequential alteration.

As provided in Section 131(3) of the Companies Act, 2013, the Central Governmentmay make rules as to the application of the provisions of the Act in relation to revisedfinancial statement or a revised Director's report and such rules may in particular:

• make different provisions according to which the prevision financial statementsor the reports are replaced or are supplemented by a document indicating thecorrections to be made;

• make provisions with respect to the functions of the company's auditor in relationto the revised Financial statements or report;

• require the directors to take such steps as may be prescribed.

As provided in Rule 77 of the National Company Law Tribunal Rules, 2016

(1) where it appears to the directors of a company that the financial statements ofthe company or the report of the Board do not comply with the provisions ofSection 129 (Financial Statements) or Section 134 (Financial Statements, Boardreport etc.), the application to the National Company Law Tribunal (the Tribunal)shall be made by the company in Form No. NCLT-l within 14 days of the resolutionpassed by the Board along-with prescribed fees.

(2) In case the majority of the directors of the company or the auditor of the companyhas changed immediately before the decision was taken to apply under Section131, the company shall disclose such facts in the application.

(3) the application filed in Form NCLT 1 to the Tribunal, shall set forth the followingparticulars:

a. the financial year or period to which such accounts relates.

b. the names and contact details of the managing director, chief financialofficer, directors, company secretary and officers of the company responsiblefor making and maintaining such books of accounts and financial statement.


c. where such books of accounts are audited, the name and contact details ofthe auditor or any other former auditor who audited such accounts.

d. copy of the board resolution passed by the board of directors.

e. grounds seeking revision of financial statement of Board's Report.

(4) The company shall at least 14 days before the date of hearing advertise theapplication as per Rule 35 of the National Company Law Tribunal Rules, 2016.

(5) The Tribunal shall issue notice and hear the auditor of the original financialstatement, if present auditor is different and after considering the applicationand hearing the auditor and any other person as the Tribunal may deem fit, maypass appropriate orders in the matter.

(6) A certified copy of the order of the Tribunal shall be filed with the Registrar ofCompanies within 30 days of the receipt of the certified copy.

(7) A general meeting may be called on receipt of the order of the Tribunal andnotice of such general meeting along with reasons for change in financialstatements may be published in newspaper in english and vernacular language.

(8) In the general meeting, the revised financial statements, statement of directorsand the statement of auditors may be put up for consideration before a decisionis taken on adoption of the revised financial statements.

(9) On approval of the general meeting, the revised financial statements, statementof auditors or revised report of the Board as the case may be, shall be filed withthe Registrar within days of the general meeting approval.

The Board of Directors of ABC Ltd will be advised accordingly

Question 6

(a) Manoj was appointed as Managing Director of Silver Ltd. for 5 years. He resignsfrom his office after completing 2 years with Silver Ltd., for joining as ManagingDirector of another company and demands compensation from the company.The Board of Directors of Silver Ltd. approach you for advise as a PracticingCompany Secretary. Briefly discuss the relevant provisions of the CompaniesAct, 2013 and advise. (4 marks)

(b) (i) Star Ltd. has 3425 members. Advise the Board of Directors of the companyon the quorum of its Annual General Meeting.

(ii) ABC Ltd. was registered under the companies Act, 2013 in May, 2018. Canthe company contribute to a recognized political party. Advise. (4 marks)

(c) State the matter along with relevant sections(s) of the Companies Act, 2013 forwhich the following E-Forms are required to be filed :

(1) E-Form No. INC 18

(2) E-Form No. CHG 6

(3) E-Form No. CRA 4

(4) E-Form No. FC 4 (4 marks)


(d) BCD Ltd. has paid up share capital of 40,00,000 equity shares of `10 each.Kalyan holding 40,000 equity shares has given notice to the company forinspection of the books of accounts of the company. Advise the company.

(4 marks)

Answer 6(a)

The provisions of Section 202 of the Companies Act, 2013 provide for payment ofcompensation for loss of office to managing director or whole-time director or manager.The provisions are discussed below.

(1) As per Section 202(1) of the Companies Act, 2013, a company can make paymentof compensation for loss of office to managing director or whole-time director ormanager but not to any other director, by way of compensation for loss of officeor as consideration for retirement from office or in connection with such loss orretirement.

(2) As per Section 202(2) of the Companies Act, 2013, no payment of compensationfor loss of office can be made in the following cases.

• where a director resigns from his office as a result of the reconstitution ofthe company or of its amalgamation with other body corporate or bodiescorporate and is appointed as managing or whole time director or manageror other officer in the reconstituted company or of the body corporate resultingfrom the amalgamation;

• where a director resigns from his office otherwise than on reconstruction oramalgamation of the company as aforesaid;

• where the office of the director is vacated under Section 167 (1) of theCompanies Act, 2013;

• where the company is being wound up by the order of NCLT or voluntarilydue to negligence or default of the director;

• where a director has been guilty of fraud or breach of trust or gross negligenceor mismanagement of the affairs of the company or any subsidiary companyor holding company thereof; and

• where a director has instigated or has taken part directly or indirectly inbringing about, the termination of his office.

In view of the above provisions of Section 202(2) of the Companies Act, 2013 above,Mr. Manoj will not be entitled for any compensation from Silver Ltd.

Answer 6(b)(i)(i) The provisions of quorum for general meetings of the members of the company

contained in Section 103 of the Companies Act, 2013 are stated as below.

(i) Unless the articles of association of a company provide for a larger number,the quorum for the general meetings of a Public Company shall be as under:

(a) In case of a Public Company

• five members personally present if the number of members as onthe date of the meeting is not more than one thousand;


• fifteen members personally present if the number of members ason the date of the meeting is more than one thousand but upto fivethousand;

• thirty members personally present if the number of members as onthe date of the meeting exceeds five thousand.

(b) in the case of a private company, two members personally present,shall be the quorum of the general meeting.

Accordingly, Star Ltd being a Public company, having more than one thousand butupto five thousand members, is required to have personal presence of fifteen or moremembers at the general meetings to ensure presence of the quorum and the Board ofDirectors shall accordingly comply with the quorum requirements at the general meetings.

Answer 6(b)(ii)

As per Section 182(1) of the Companies Act, 2013 notwithstanding anything containedin any other provisions of this Act, a company other than a government company and acompany which has been in existence for less than three financial years, may contributeany amount directly or indirectly to any political party.

As ABC Ltd. was registered in May, 2018, therefore it is in existence for less than 3financial years and therefore the company is not eligible for making contribution to arecognised political party.

Answer 6(c)

(1) E-Form No. INC -18

Section 8(4)(ii) of the Companies Act, 2013 read with Rule 21(4) of Companies(Incorporation) Rules, 2014.

Application to Regional Director for conversion of section 8 company into companyof any other kind.

(2) E -Form No. CHG - 6

Section 84(1) and Section 384 of the Companies Act, 2013 read with Rule 9(1)of Companies (Registration of Charges) Rules, 2014

Notice of appointment or cessation of receiver or manager.

(3) E-Form No. CRA - 4

Section 148(6) of the Companies Act, 2013 read with rule 6(6) of the Companies(cost records and audit) Rules, 2014]

Form for filing Cost Audit Report with the Central Government.

(4) E-Form No. FC - 4

Section 384(2) of the Companies Act, 2013 read with Rule 7 Companies(Registration of Foreign Companies) Rules, 2014 deals with Annual Return of aforeign company.


Answer 6(d)

The provisions of inspection of books of accounts and other books and papersmaintained by the company are contained in Section 128(3) and 128(4) of the CompaniesAct, 2013 as under:

(i) As per Section 128(3) of the Companies Act, 2013 the books of account andother books and papers maintained by the company within India shall be openfor inspection at the registered office of the company or at such other place inIndia by any director during business hours, and in the case of financial information,if any, maintained outside the country, copies of such financial information shallbe maintained and produced for inspection by any director subject to suchconditions as may be prescribed:

Provided that the inspection in respect of any subsidiary of the company shallbe done only by the person authorised in this behalf by a resolution of the Boardof Directors.

(ii) As per Section 128(4) of the Companies Act, 2013, where an inspection is madeunder Sub section (3), the officers and other employees of the company shallgive to the person making such inspection all assistance in connection with theinspection which the company may reasonably be expected to give.

As per the above mentioned provisions, only the Director of the company caninspect the books of accounts and other books and papers maintained by thecompany. A shareholder irrespective of the shares held by him, has no right toinspect the books of accounts and other books and papers maintained by thecompany.

The application of Mr. Kalyan is not in accordance with the provisions of the Act andtherefore the application has to be declined by the company.

***

PP–SACM&DD–December 2019 30

SECRETARIAL AUDIT, COMPLIANCE MANAGEMENTAND DUE DILIGENCE


NOTE : Answer ALL Questions.

PART A

(Attempt all parts of either Q. No. 1 or Q. No. 1A)

Question 1

(a) Aroma Private Ltd. with paid-up capital of ̀ 60 Lakh is a subsidiary of AyurvedicLtd., a public company having a paid-up capital of ̀ 40 crore and turnover of ̀ 35crore. During a Board meeting, Ram, one of the Directors, asked for furnishingthe secretarial audit report of the company stating that it is a mandatory reportand should be presented to the Board. The other Board members did not agreewith Ram. Being a Company Secretary what would you advise to the Board ?

(5 marks)

(b) One of the Directors of Marksmen Ltd. leaked an insider information in themarket for personal profit. A, auditor of the company, in the course of performanceof his duties finds out this offence which involves the amount of ` 2 crore orabove. As the auditor of the company, what would A report about this ? Alsostate the consequences of non-compliance by the Auditor. (5 marks)

(c) List out the check points to be observed by Company Secretary while conductingthe Secretarial Audit with regard to Attendance at meetings of the company asper Secretarial Standard-I. (5 marks)

(d) Aura Ltd. has received a request from Joe, one of the legal representatives of adeceased member James, for transmission of 1000 equity shares. MeanwhileJennie, the spouse of James, being a joint holder along with James alsoapproached the company for transmission of those 1000 equity shares in herfavour. You, as a Company Secretary of the company, need to check these twoclaims of transmission of shares and effect the transmission in compliance withthe provisions of the Companies Act, 2013. Indicate your course of action in thiscase. (5 marks)

(e) Ray, the Independent Director of a company has brought to the notice of theBoard that the company is mandatorily required to file E-Form ACTIVE. As theCompany Secretary of the company, you are required to highlight the relevantprovisions and consequences of not filing the E-Form ACTIVE within thestipulated time. (5 marks)

OR (Alternate Question to Q. No. 1)

Question 1A

(i) VPS Construction Private Ltd. is working on a project of constructing 80 well30

31 PP–SACM&DD–December 2019

equipped hospitals in 10 different cities. For raising capital, the company offeredits securities to 400 investors (which include 150 Qualified Institutional Buyersand the Employees who have been given securities under ESOP Scheme) underprivate placement scheme in current financial year, maintaining record of offerletter in Form PAS-4. The share certificates were issued after 3 months ofallotment of shares.

Being a Company Secretary, state with reasons whether or not the companyhas complied with the provisions of the Companies Act, 2013 with reference tothe above activities ? (5 marks)

(ii) You are appointed as the Secretarial Auditor of Varuna Food Supplier Ltd., aBSE listed company, for conducting Secretarial Audit for the financial year 2018-19. During the audit, you find the following information :

(a) This year company got covered under Sec. 135 of Companies Act, 2013and so constituted a Corporate Social Responsibility (CSR) committee.

(b) Mr. A, Director (Finance), resigned from the company.

(c) Notice of closure of the register of members, debenture holders and othersecurity holders.

(d) The company applied for License under Sec. 8 of the Companies Act, 2013.State website disclosures requirements to be checked for above under theCompanies Act, 2013. (5 marks)

(iii) State the disclosures that need to be annexed to the Report of Board of directorswith regard to ‘‘Public Deposits’’ as per the Secretarial Standard-4 (SS-4).

(5 marks)

(iv) ‘‘Secretarial Audit is to be on the principle of ‘Prevention is better than cure’rather than a post mortem exercise and to find faults’’. Explain. (5 marks)

(v) List out the check points to be observed by a Company Secretary while conductingthe Secretarial Audit with regard to Quorum of the meetings as per SecretarialStandard-1. (5 marks)

Answer 1(a)

Section 204 of the Companies Act, 2013 read with Rule 9 of the Companies(Appointment and Remuneration of Managerial Personnel) Rules, 2014 provides formandatory Secretarial Audit for every listed company and such prescribed class ofcompanies as mentioned below:

(a) Every public company having a paid-up share capital of Fifty crore rupees ormore; or

(b) Every public company having a turnover of Two Hundred Fifty crore rupees ormore

Secretarial Audit is also applicable to a private company which is a subsidiary of apublic company, and which falls under the prescribed class of companies as indicatedabove.


Hence, as company secretary, I will advise to the board of Aroma Private Ltd. thatthe company is not compulsorily required to present the Secretarial Audit Report to theboard and annex the same with Board Report of the company, because paid up sharecapital of Aroma Limited and turnover and paid up share capital of Ayurvedic Limited arebelow the limits specified in Rule 9 of the Companies (Appointment and Remuneration ofManagerial Personnel) Rules, 2014.

However, the companies which are not covered under section 204 may obtainSecretarial Audit Report voluntarily as it provides an independent assurance of thecompliances of applicable laws of the company.

Answer 1(b)

Section 143(12) read with the Companies (Audit and Auditors) Rules, 2014 providesthat if an auditor of a company in the course of the performance of his duties as auditor,has reason to believe that an offence of fraud, which involves or is expected to involveindividually an amount of rupees one crore or above, is being or has been committedagainst the company by its officers, the auditor shall report the matter to the CentralGovernment.

The auditor shall report the matter to the Central Government as under:-

(a) The auditor to report the matter to the Board or the Audit Committee, as thecase may be, immediately but not later than 2 days of his knowledge of thefraud, seeking their reply or observations within 45 days;

(b) On receipt of such reply or observations, the auditor shall forward his report andthe reply or observations of the Board or the Audit Committee along with hiscomments (on such reply or observations of the Board or the Audit Committee)tothe Central Government within 15 days from the date of receipt of such reply orobservations;

(c) In case the auditor fails to get any reply or observations from the Board or theAudit Committee within 45 days, he shall forward his report to the CentralGovernment along with a note containing the details of his report that was earlierforwarded to the Board or the Audit Committee for which he has not received anyreply or observations;

(d) The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealedcover by Registered Post with Acknowledgement Due or by Speed Post followedby an e-mail in confirmation of the same.

(e) The report shall be on the letter-head of the auditor containing postal address, e-mail address and contact telephone number or mobile number and be signed bythe auditor with his seal and shall indicate his Membership Number; and

(f) The report shall be in the form of a statement as specified in Form ADT-4.

In case, the auditor does not comply with the provisions of section 143(12) ofCompanies Act, 2013, he shall be punishable with fine which shall not be less than onelakh Rupees but which may extend to twenty-five lakh rupees.


Answer 1(c)

CHECKLIST TO BE ENSURED BY THE COMPANY SECRETARY FOR THEATTENDANCE AT THE MEETINGS AS PER THE SECRETARIAL STANDARD -1

This standard relates to meetings of the Board of Directors As per Para 4 of SecretarialStandard-1, the check points for Attendance at the Meetings are as under:

1. Para 4.1.1 of SS-1 prescribes that every company shall maintain AttendanceRegisters for the Meetings of the Board and Meetings of the Committee.

2. Para 4.1.2 of SS-1 prescribes that the attendance register shall contain thefollowing particulars: serial number and date of the meeting; in case of aCommittee Meeting name of the Committee; place of the Meeting; time of theMeeting; names and signatures of the Directors, the Company Secretary andalso of persons attending the Meeting by invitation and their mode of presence,if participating through Electronic Mode.

3. Para 4.1.3 of SS-1 prescribes that the attendance register shall be deemed tohave been signed by the Directors participating through Electronic Mode, if theirattendance is recorded in the attendance register and authenticated by theCompany Secretary or where there is no Company Secretary, by the Chairmanor by any other Director present at the Meeting, if so authorized by the Chairmanand the fact of such participation is also recorded in the Minutes.

4. Para 4.1.4 of SS-1 prescribes that the attendance register shall be maintainedat the Registered Office of the company or such other place as may be approvedby the Board.

5. Para 4.1.5 of SS-1 prescribes the attendance register is open for inspection bythe Directors even after a person ceases to be a Director, he shall be entitled toinspect the attendance register of the Meetings held during the period of hisDirectorship.

6. Para 4.1.6 of SS-1 prescribes the attendance register shall be preserved for aperiod of at least eight financial years from the date of last entry made thereinand may be destroyed thereafter with the approval of the Board.

7. Para 4.1.7 of SS-1 prescribes the attendance register shall be in the custody ofthe Company Secretary.

8. Para 4.2 of SS-1 prescribes leave of absence shall be granted to a Director onlywhen a request for such leave has been communicated to the Company Secretaryor to the Chairman or to any other person authorised by the Board to issueNotice of the Meeting.

Answer 1(d)

Transmission of shares

Article 23(i) of Table F of Schedule I of the Companies Act, 2013 provides that on thedeath of a member, the survivor or survivors where the member was a joint holder, and hisnominee or nominees or legal representatives where he was a sole holder, shall be theonly persons recognised by the company as having any title to his interest in the shares.


Accordingly, In case of Transmission of share, the Company Secretary should checkwhether:

- The shares have been transmitted to the legal representative of the deceasedshareholder in the case of death of a sole shareholder; and

- In the case of joint holdings only to the survivor(s).

- Transmission of share is effected upon the production of succession certificateor probate or letter of administration or indemnity duly signed by the legal heirsof the deceased or as per procedure stipulated by the board and / or Article ofAssociation.

In the present case, James was the deceased member who held 1000 Equity sharesalong with Ms. Jennie, being as joint holder and the only survivor and for the transmissionof share they were two claimants:

1. Mr. Joe, the legal representative of the deceased member

2. Ms. Jennie, the spouse of the deceased member who is also the joint shareholder of 1000 along with the deceased member.

Thus, in view of above, the shares shall be transmitted in favour of Ms. Jennie, beingthe survivor of shares held by her jointly with the deceased member of the companysubject to the fulfillment of other applicable conditions.

Answer 1(e)

Active Company Tagging Identities and Verification (ACTIVE)

As per Rule 25A of Companies (Incorporation) Rules, 2014, every companyincorporated on or before 31st December, 2017 shall file the particular of the companyand its registered office in E-form ACTIVE (Active Company Tagging Identities andVerification) on or before 15th June, 2019.

Provide that any company which has not filed its due financial statements undersection 137 or annual return under Section 92 or both of Companies Act, 2013 with theRegistrar shall be restricted from filling E- from ACTIVE, unless such company is undermanagement dispute and the Registrar has recorded the same on the register.

Provided further that companies which have been struck off or are under process ofstriking off or under liquidation or amalgamated or dissolved, as recorded in the register,shall not be required to file E-Form ACTIVE.

The consequences of not filing E-from ACTIVE within the stipulated period areenumerated below:

In case a company does not intimate the prescribed particulars to the Registrar in E-Form ACTIVE, the company shall be marked as “ACTIVE -non-complaint” on or after16th June, 2019 and shall he liable for action under sub-section (9) of section 12 of theCompanies Act, 2013.

Provide also that no request for recording for the following event based information orchange shall be accepted by the Registrar from such companies marked as “ACTIVE-


NON-COMPLIANT”, unless the E-from ACTIVE is filled. Company could not file followingevent based e-Forms such as

- SH- 07 (Change in Authorized Capital)

- PAS-03 (Change in Paid-up Capital)

- DIR-12 (Change in Directorship except cessation)

- INC-22 (Change in Registered office)

- INC-28 (Amalgamation, de-merger)

It is to be noted that where a company files E-from Active on or after 16th June2019, the company shall be marked as “ACTIVE Complaint “, on payment of fee ofRupees Ten Thousand.

DIR-12, Change in Directorship except in case of:

1. Cessation of any Director or

2. Appointment of Director when the total number of directors have fallen below theminimum number provided in clause (a) of sub-section (1) of section 149 onaccount of disqualification of all or any of the director under section 164 ofCompanies Act, 2013.

3. Appointment of any director in such company where DINs of all or any it’sdirector(s) have been deactivated.

4. Appointment of director(s) for implementation of order passed by Court or Tribunalor Appellate Tribunal under provisions of Companies Act, 2013 or Insolvency andBankruptcy Code, 2016.

Answer 1A (i)

A. As per the section 42 of the Companies Act, 2013 read with Rule 14 of Companies(Prospectus and Allotment of Securities) Rules, 2014, as a Company Secretaryit is required to check the following compliances:

• To ensure that persons to whom offer or invitation to subscribe securitiesunder private placement may be made not to exceed 200 in the aggregatein a financial year. It is to be noted that any offer or invitation made toqualified institutional buyers or to employees of the company under schemeof employees stock option shall not be considered while calculating thelimit of two hundred persons.

• Issue of private placement offer cum application letter in Form PAS-4 seriallynumbered and addressed specifically to the person to whom offer is madeand shall be sent to him, either in writing or in electronic mode, within 30days of recording name of such person pursuant to sub-section (3) of Section42 of Companies Act, 2013.

• The Company shall maintain complete record of offer letters in Form PAS-5.


• A return of allotment of securities under section 42 of Companies Act, 2013shall be filed with the Registrar within fifteen days of allotment in FormPAS-3 and with the fee as provided in the Companies (Registration officesand Fees) Rules, 2014 along with a complete list of all allottees.

• A company shall issue private placement offer cum application letter onlyafter the relevant special resolution or Board resolution has been filed withthe Registrar.

Provided that private companies shall file with the Registrar copy of the Boardresolution or special resolution with respect to approval under clause (c) ofsubsection (3) of section 179 of Companies Act, 2013.

B. According to Section 56(4) of Companies Act, 2013, Share certificates are to bedelivered within 2 months of allotment of shares / 6 months of allotment ofdebentures.

C. According to Section 2(68) of the Companies Act, 2013, a private companycannot have more than 200 Members.

Accordingly in the given case reasons for the non-compliance of the provisions ofthe Companies Act, 2013 shall be as under:

1. Private Company cannot have more than 200 members. Therefore, offer isinvalid.

2. Further, the number of persons to whom the securities have been offeredexceeding the limits of 200 as prescribed under Section 42 i.e. (400-150 = 250)(400 investors include 150 Qualified Institutional Buyers and employees whohave been given securities under ESOP scheme).

3. The record of offer letters has not been maintained in PAS-5.

4. The share certificated has not been issued within 2 months of allotment ofshares.

Based on the facts, it can be conclude that VPS Construction Private Ltd. has notcomplied with the provisions of the Companies Act, 2013.

Answer 1A(ii)

(a) Section 135 of the Companies Act, 2013 read with Rule 9 of the Companies(Corporate Social Responsibility Policy) Rules, 2014, the Board of Directors ofthe company shall, after taking into account the recommendations of CSRCommittee, approve the CSR Policy for the company and disclose contents ofsuch policy in its report and the same shall be displayed on the company’swebsite, if any.

(b) As per Section 168 of the Companies Act, 2013 read with Rule 15 of theCompanies (Appointment and Qualification of Directors) Rules, 2014, informationabout the resignation of the Director shall be posted on the website of the company,if any. Further, within 30 days from the date of receipt of notice of resignationfrom a director, intimate the Registrar in Form DIR-12.

Since, the company is a listed company, it shall comply with the regulations 30of the SEBI (LODR) Regulations, 2015.


(c) As per Section 91 of the Companies Act, 2013 read with Rule 10(1) of theCompanies (Management and administration) Rules, 2014, notice of closure ofthe register of members, debenture holder or other security holders shall beuploaded on the website of the company at least seven days before the closingthe register of the members, if any, and on the website as notified by the CentralGovernment.

(d) As per Rule 20(3)(b) of the Companies (Incorporation) Rules, 2014, the existingcompany shall, for the purpose of license under section 8 of the CompaniesAct, 2013 to publish a notice in the newspaper, and shall also be uploaded onthe website as may be notified by the Central Government, within a week fromthe date of making the application to the Registrar.

However, Varuna Food Suppliers Ltd. is a listed company and the Companies Act,2013 does not provide specifically for conversion of a listed company in to Section 8Company.

Answer 1A(iii)

The Companies Act, 2013 requires the Board of directors of every company to attachits report along with the financial statements to be laid before the members at the AnnualGeneral Meeting.

Accordingly, the Secretarial Standard (SS-4) prescribes a set of principles for makingdisclosures in the Report of the Board of Directors of the company and other mattersrelated thereto. The company as per this standard (SS-4) amongst various disclosures,a detailed information with regard to the Public Deposits shall be given which containsthe following disclosures;

(a) Details of deposits accepted during the year;

(b) Deposits remaining unpaid or unclaimed as at the end of the year;

(c) Whether there has been any default in repayment of deposits or payment ofinterest thereon during the year and if so, the number of such cases and thetotal amount involved:

(i) at the beginning of the year;

(ii) maximum during the year (i.e. highest number of cases pending repaymentof deposits or interest during the year and maximum amount that was due);

(iii) at the end of the year;

(d) Details of deposits which are not in compliance with the requirements of theAct;

(e) Details of National Company Law Tribunal (NCLT) /National Company LawAppellate Tribunal (NCLAT) orders with respect to depositors for extension oftime for repayment, penalty imposed, if any;

(f) In case of a private company, details of amount received from a person who atthe time of the receipt of the amount was a Director of the company or relativeof the Director of the company.


Answer 1A(iv)

The provisions of Secretarial Audit has been provided under Section 204 of theCompanies Act, 2013 read with Rule 9 of the Companies (Appointment and ManagerialPersonnel) Rules, 2014. It is the process of independent verification, examination oflevel of compliance of applicable Corporate Laws to a company. The audit process ifproperly devised ensures timely compliance and eliminates any un-intended non-compliance of various applicable rules and regulations. An action plan of the CorporateSecretarial Department is to be designed so as to ensure that all event based and timebased compliances are considered and acted upon. Secretarial Audit is to be on theprinciple of “Prevention is better than cure” rather than post mortem exercise and to findfaults. Broadly, the need for Secretarial Audit is understood from the following points:

• Effective mechanism to ensure that the legal and procedural requirements areduly complied with.

• Provides a level of confidence to the directors & Key Managerial Personnel etc.

• Directors can concentrate on important business matters as Secretarial Auditthereby ensuring legal and procedural requirements.

• Strengthening the image and goodwill of a company in the minds of regulatorsand stakeholders

• Secretarial Audit is an effective governance and compliance risk managementtool.

• It helps the investor in analyzing the compliance level of companies, therebyenhancing the reputation of the Company.

Answer 1A(v)

CHECKLIST FOR THE QUORUM TO BE ENSURED BY COMPANY SECRETARY ASPER SECRETARIAL STANDARD-1

This standard relates to meetings of Board of Directors, as per Para 3 of SecretarialStandard-1, the check points for the quorum are as under:

The Quorum for a Meeting of the Board shall be one-third of the total strength of theBoard, or two Directors, whichever is higher.

• Para 3.1 states that the requisite quorum shall be present throughout the meeting.

Quorum shall be present not only at the time of commencement of the Meetingbut also while transacting business.

• Para 3.2 states that a Director shall neither be reckoned for Quorum nor shall beentitled to participate in respect of an item of business in which he is interested.However, in case of a private company, a Director shall be entitled to participatein respect of such item after disclosure of his interest.

• Para 3.3 states that directors participating through Electronic Mode in a Meetingshall be counted for the purpose of Quorum, unless they are to be excluded forany items of business under the provisions of the Companies Act, 2013 or anyother law.


• Para 3.4 Meeting of the Board

Para 3.4.1 The quorum for a meeting of the board shall be one third of the totalstrength of the Board, or Two directors, whichever is higher.

• Para 3.5 Meeting of the Committee

Unless otherwise stipulated in the Act or the Articles or under any other law, thequorum for meeting of any Committee constituted by the board shall be asspecified by the Board. If no such Quorum is specified, the presence of all themembers of ant such committee is necessary to form the Quorum.

PART B


Question 2

(a) Economic and social factors are recognized and assessed while setting up anindustry. State the factors which must be considered in respect of locations tobe avoided in setting up an industry.

(b) Twinbirds Inc., a company registered in Mauritius has recently set up a backoffice at Hyderabad in the State of Telangana, wherein the company providesservice to its customers. Wood Ltd., an Indian entity, holds 74% of equity in theabove Mauritius based company. You are required to advise the company withregard to the compliance, if any, in line with the provisions applicable to aforeign company under the Companies Act, 2013.

(c) Prepare a checklist for right issue of shares. (5 marks each)


Question 2A

(i) Royal X Ltd., a listed company, has issued USD 50 Million Indian DepositoryReceipts (IDRs). Prepare a checklist for equitable treatment to IDR holders asper the Securities and Exchange Board of India (Listing Obligations andDisclosure Requirements) Regulations, 2015. (5 marks)

(ii) Ashu Ltd. and Pragarti PMC Ltd. have entered in to a Joint Venture Agreement(JVA). Pursuant to provisions of JVA, a Joint Venture Company (JVC) shall beincorporated to run the Project Management and Assistance Business inCambodia. Apart from capital investment, both parties will provide knowhowand intellectual assistance including business secrets to JVC. In this regard,Ashu Ltd. and Pragarti PMC Ltd. need to enter in a Non-disclosure Agreement.

List out the points to be incorporated in the Undertaking Clause of the Non-disclosure Agreement. (5 marks)

(iii) Write a note on abuse of dominance under the Competition Act, 2002.(5 marks)

Answer 2(a)

Generally economic and social factors are recognized and assessed while settingup an industry. Environmental factors must also be taken into consideration in setting


up an industrial undertaking. Factors like, proximity of water sources, highways, majorsettlements, markets for products and raw material resources are desired for economyof production. Industries are, therefore, required to be established by striking a balancebetween economic and environmental considerations. Thus, with reference to siteidentification for setting up of industries the following factors must be considered :

• No forest land shall be converted into non-forest activity for the sustenance ofthe industry (Ref: Forest Conservation Act, 1980).

• No prime agricultural land shall be converted into industrial site.

• Land acquired shall be sufficiently large to provide space for appropriate treatmentof waste water which may be still left for treatment after maximum possiblereuse and recycle. Reclaimed (treated) waste water shall be used to raise greenbelt and to create water body for aesthetics, recreation and if possible, foraquaculture. The green belt shall be 1/2 km wide around the battery limit of theindustry. For industry having odour problem, it shall be a kilometer wide.

• The green belt between two adjoining large scale industries shall be one kilometer.

• Enough space should be provided for storage of solid wastes so that thesecould be available for possible reuse.

• Lay out and form of the industry that may come up in the area must conform tothe landscape of the area without affecting the scenic features of that place.

• Associated township of the industry must be created at a space havingphysiographic barrier between the industry and the township.

• Each industry is required to maintain three ambient air quality measuring stationsthe within 120 degree angle between the stations.

Answer 2(b)

According to Section 2 (42) of the Companies Act, 2013 a “foreign company” meansany company or body corporate incorporated outside India which:

• Has a place of business in India whether by itself or through an agent, physicallyor through electronic mode; and

• Conducts any business activity in India in any manner.

Section 379(1) of Companies Act, 2013 provides that Sections 380 to 386 (bothinclusive) and sections 392 and 393 of Companies Act, 2013 shall apply to all foreigncompanies.

Further, section 379 (2) of the Companies Act, 2013 states that where not less than50% of the paid up share capital whether equity or preference or partly equity and partlypreference of a foreign company is held by one or more citizens of India or by one ormore companies or body corporates incorporated in India, or by one or more citizens ofIndia and one or more companies or bodies corporate incorporated in India, whethersingly or in the aggregate, such company shall comply with the provisions of ChapterXXII Companies Incorporated Outside India and such other provisions of the CompaniesAct, 2013 as may be prescribed with regard to the business carried on by it in India asif it were a company incorporated in India.


In this present case in the question, the following facts are given:

(a) Twinbirds Inc. was incorporated in Mauritius and has a place of business inHyderabad, hence it is a foreign company.

(b) The majority of the shareholding of 74% is held by M/S Wood Limited an Indianentity.

Thus Twinbirds Inc. would be covered under section 379 and shall comply with theprovisions of Chapter XXII of the Companies Act, 2013 and such other provisions of theCompanies Act, 2013 as may be prescribed with regard to the business carried on by itin India as if it were a company incorporated in India.

Answer 2(c)

As per Section 62(1) of the Companies Act, 2013 if the Company decides to issuefresh shares, these should be offered to existing shareholders in proportion to existingshareholding.

Checklist for Rights Issue :

1. Certified true copy of the resolution passed by the Board of Directors for issue ofsecurities under proposed rights issue/approving the proposed fast track rightsissue.

2. Certified true copy of the resolution passed by the Shareholders, if any;

a. for issue of securities under proposed rights issue/fast track rights issue

b. increase in the authorised share capital (if required)

c. Check whether the copy of Form SH-7, MGT-14 filed with ROC.

3. Undertaking from the Company that the entire issued capital of the company islisted with Exchange and are fully paid up.

4. Certificate from all Lead Manager/Merchant Banker and Company with respectto compliances in case of fast track rights issue.

5. Whether the issuer company has made reservation of equity shares of the sameclass in favour of the holders of outstanding compulsorily convertible debtinstruments, if any, in proportion to the convertible part thereof, while opening arights issue of equity shares.

6. Check whether the equity shares so reserved were issued at the time of conversionof convertible debt instruments on the same terms at which equity shares offeredin rights issues.

7. Whether the issuer company has made reservation for employees along withrights issue subject to the condition that value of allotment to any employeeshall not exceed rupees two lakhs.

8. Check whether the issuer is in compliance with the conditions for continuouslisting of equity shares as specified in the listing agreement with the recognisedstock exchange where the equity shares of the issuer are listed.


9. Once the allotment is made, the company shall within 30 days of allotment, filewith the Registrar are turn of allotment in Form PAS-3, along with the fee asspecified in Companies (Registration of Offices and Fees) Rules, 2014.

Answer 2A(i)

Regulation 74 of Securities and Exchange Board of India (Listing Obligations andDisclosure Requirements) Regulations, 2015 prescribes Equitable Treatment to IndianDepository Receipts (IDR) Holders.

The checklist for the equitable treatment of IDR may be as under:

• Check if the listed entity's equity shares or other securities representing equityshares are also listed on the stock exchange(s) in countries other than its homecountry, it shall ensure that Indian Depository Receipts’s Holders are treated ina manner equitable with security holders in home country.

• Check whether the listed entity ensures that for all corporate actions, exceptthose which are not permitted by Indian laws, it shall treat Indian DepositoryReceipts’s holders in a manner equitable with security holders in the homecountry.

• Check in case of take-over or delisting or buy-back of its equity shares, thelisted entity shall, while following the laws applicable in its home country, giveequitable treatment to Indian Depository Receipts’s holders vis-à-vis securityholder in home country.

• Check whether the listed entity ensures protection of interests of Indian DepositoryReceipts’s holders particularly with respect to all corporate benefits permissibleunder Indian laws and the laws of its home country and shall address all investorgrievances adequately.

Answer 2A(ii)

Specimen Undertakings Clause of Non-Disclosures Agreement is as under:

Subject to the Exceptions Clause and in consideration of the disclosure of confidentialinformation by the Disclosing Party, the Receiving Party agrees:-

(i) to keep confidential and not disclose to any third party, copy, reproduce, adapt,divulge, publish or circulate any part of or the whole of any Confidential Informationwithout the prior written consent of the Disclosing Party; and

(ii) to restrict access to the Confidential Information disclosed to it under thisAgreement to those of its employees and officers who need to know the samestrictly for the Purpose; and

(iii) not to use Confidential Information disclosed to it under this Agreement for anypurpose other than the Purpose; and

(iv) not to combine any part of or the whole of the Confidential Information with anyother information; and

(v) not to disclose the whole or any part of the Confidential Information to any thirdparty without the prior written consent of the Disclosing Party and prior todisclosure to such third party procuring that the third party is bound by obligationswhich are no less onerous than those contained in this Agreement; and


(vi) to procure that each employee and officer to whom Confidential Information isdisclosed under this Agreement is, prior to such disclosure, informed of theterms of this Agreement and agrees to be bound by them; and

(vii) to procure that the Confidential Information in its possession is stored securelyand that physical access to it is controlled.

Answer 2A(iii)

Abuse of dominance is judged in terms of the specified types of acts committed bya dominant enterprise alone or in concert. Such acts are prohibited under the law. Section4(2) of the Competition Act, 2002 specifies the following practices by a dominant enterpriseor group of enterprises as abuse of dominant position, when:

• directly or indirectly imposing unfair or discriminatory condition in purchase orsale of goods or service;

• directly or indirectly imposing unfair or discriminatory price in purchase or sale(including predatory price) o f goods or service;

• limiting or restricting production of goods or provision of services or market;• limiting or restricting technical or scientific development relating to goods or

services to the prejudice of consumers;• denying market access in any manner;• making conclusion of contracts subject to acceptance by other parties of

supplementary obligations which, by their nature or according to commercialusage, have no connection with the subject of such contracts;

• using its dominant position in one relevant market to enter into, or protect, otherrelevant market.

Question 3

(a) As a company secretary, state the corporate governance requirements withrespect to subsidiary of a listed company under the Securities and ExchangeBoard of India (Listing Obligations and Disclosure Requirements) Regulations,2015. (8 marks)

(b) Sharma and Verma are the shareholders of Mukta Enterprises Ltd., an unlistedpublic company, holding 5000 equity shares each. Both the shareholders havetheir holdings in physical form. In June 2019, they decided to transfer theirshares but could not transfer due to the recent changes in the law. Advise themabout relevant rules and prepare checklist for the company to ensure complianceof rules relating to issue of securities in dematerialised form by unlisted publiccompanies. (7 marks)

Answer 3(a)

Regulation 24 of Securities and Exchange Board of India (Listing Obligations andDisclosure Requirements) Regulations, 2015 prescribe corporate governancerequirements with respect to subsidiary of listed entity, as below:

(1) At least one independent director on the board of directors of the listed entityshall be a director on the board of directors of an unlisted material subsidiary,whether incorporated in India or not.


(2) The audit committee of the listed entity shall also review the financial statements,in particular, the investments made by the unlisted subsidiary.

(3) The minutes of the meetings of the board of directors of the unlisted subsidiaryshall be placed at the meeting of the board of directors of the listed entity.

(4) The management of the unlisted subsidiary shall periodically bring to the noticeof the board of directors of the listed entity, a statement of all significanttransactions and arrangements entered into by the unlisted subsidiary.

Explanation.-For the purpose of this regulation, the term ?”significant transactionor arrangement” shall mean any individual transaction or arrangement that exceedsor is likely to exceed ten percent of the total revenues or total expenses or totalassets or total liabilities, as the case may be, of the unlisted subsidiary for theimmediately preceding accounting year.

(5) A listed entity shall not dispose of shares in its material subsidiary resulting inreduction of its shareholding (either on its own or together with other subsidiaries)to less than fifty percent or cease the exercise of control over the subsidiarywithout passing a special resolution in its General Meeting except in caseswhere such divestment is made under a scheme of arrangement duly approvedby a Court/Tribunal, or under a resolution plan duly approved under section 31of the Insolvency Code and such an event is disclosed to the recognized stockexchanges within one day of the resolution plan being approved.

(6) Selling, disposing and leasing of assets amounting to more than twenty percentof the assets of the material subsidiary on an aggregate basis during a financialyear shall require prior approval of shareholders by way of special resolution,unless the sale/disposal/lease is made under a scheme of arrangement dulyapproved by a Court/Tribunal, or under a resolution plan duly approved undersection 31 of the Insolvency Code and such an event is disclosed to therecognized stock exchanges within one day of the resolution plan being approved.

(7) Where a listed entity has a listed subsidiary, which is itself a holding company,the provisions of this regulation shall apply to the listed subsidiary in so far as itssubsidiaries are concerned.

Answer 3(b)

Rule 9A of The Companies (Prospectus and Allotment of Securities) Rules, 2014provides that

(1) every unlisted public company shall-

(a) Issue the securities only in dematerialised form; and

(b) Facilitate dematerialisation of all its existing securities

in accordance with provisions of the Depositories Act, 1996 and regulationsmade there under.

(2) every unlisted Public Company making any offer for issue of any securities orbuy back of securities or issue of bonus shares or rights offer shall ensure thatbefore making such offer, entire holding of securities of its promoters, directors,


key management personnel has been dematerialised in accordance withprovisions of the Depositories Act, 1996 and regulations made there under:

(3) Every holder of securities of an unlisted public company,

(a) who intends to transfer such securities on or after 2nd October, 2018, shallget such securities dematerialised before the transfer; or

(b) who subscribed to any securities of an unlisted public company (whether byway of private placement or bonus shares or rights offer) on or after 2ndOctober, 2018 shall ensure that all his existing securities are in dematerialisedform before such subscription.

Accordingly, the shareholders Mr. Sharma and Mr.Verma have to get their sharesdematerialised before transfer of shares.

Further, sub-rule (4) and (5) of rules 9A of the Companies (Prospectus and Allotmentof securities) Rules, 2014 provides that the company

- shall facilitate dematerialisation of all its existing securities by making necessaryapplication to a depository as defined in clause (e) of sub-section (1) of section2 of the Depositories Act, 1996 and shall secure International Security IdentificationNumber (ISIN) for each type of security and shall inform all the existing securityholders about such facility.

- shall ensure that the company makes timely payment of fees (admission aswell as annual) to the depositary and registrar to an issue and share transferagent in accordance with the agreement executed between the parties.

- shall ensure that the company maintains security deposit, at all times, of notless than two year fees with the depository and registrar to an issue and sharetransfer agent in such form as may be agreed between the parties

- shall ensure that the company complies with the regulations or directions orguidelines or circulars, if any, issued by the Securities and Exchange Board orDepository from time to time with respect to dematerialisation of shares ofunlisted public companies and matters incidental or related thereto

Accordingly, Mukta Enterprises Limited shall ensure the compliances of abovementioned provisions.

Question 4(a) Mention the time within which Public Announcement is required to be made to

the Stock Exchange under the following circumstances :

(i) Disinvestment.(ii) Acquisition of shares, voting rights or control over the Target Company

pursuant to Preferential Issue.(iii) Agreement to acquire shares or voting rights or control over the Target

Company.(iv) Acquiring shares or voting rights or control pursuant to conversion of

convertible securities with a fixed date of conversion.(v) Increase in voting rights pursuant to a buy-back not qualifying for exemption

under Regulation 10 of the Securities and Exchange Board of India(Substantial Acquisition of Shares and Takeovers) Regulations, 2011.


(b) As a company secretary state which companies are to be covered under thedefaulter list of the Reserve Bank of India. Also prepare a checklist in this regard.

(c) State the provisions for registration of charges (created/modified) with theRegistrar of Companies under the Companies Act, 2013. (5 marks each)

Answer 4(a)

The Public Announcement made under Securities and Exchange Board of India(Substantial Acquisition of Shares and Takeovers) Regulations, 2011, shall be sent to allthe stock exchanges on which the shares of the target company are listed.

Further, a copy of the same shall also be sent to the Board and to the target companyat its registered office within one working day of the date of the public announcement.The time within which the Public Announcement is required to be made to the StockExchanges under different circumstances is tabulated below:

Particulars Applicable Time of making Public Announcement toRegulation Stock Exchangeunder SEBI(SAST)Regulation,2011

(i) In case of Disinvest- 13(2)(d) On the same day as the date of executionment of agreement for acquisition of shares or

voting rights in or control over the TargetCompany.

(ii) Acquisition of shares, 13(2)(g) On the date on which the board of directorsvoting rights or control of the target company authorizes suchover the Target preferential issue.Company pursuantto Preferential Issue.

(iii) Agreement to Acquire 13(1) On the date of agreeing to acquire share,Shares or voting voting rights or control over the targetRights or Control over company.the Target Company.

(iv) Acquisition of shares, 13(2)(c) On the second working day preceding thevoting rights or control scheduled date of conversion of suchpursuant to conversion securities into shares of the Targetof convertible company.securities with a fixeddate of conversion.

(v) Increase in voting 13(2)(h) No later than 90th day from the date ofrights pursuant to a closure of the buyback offer by the targetbuy-back not company.qualifying forexemption underRegulation 10


Answer 4(b)

Companies which are to be covered under the defaulter list of RBI are termed aswillful defaulters:

A “willful default” would be deemed to have occurred if any of the following events isnoted:-

a. The company has defaulted in meeting its payment/repayment obligations tothe lender even when it has the capacity to honour the said obligations.

b. The company has defaulted in meeting its payment/repayment obligations tothe lender and has not utilised the finance from the lender for the specific purposesfor which finance was availed of but has diverted the funds for other purposes.

c. The company has defaulted in meeting its payment/repayment obligations tothe lender and has siphoned off the funds so that the funds have not been utilisedfor the specific purpose for which finance was availed of, nor are the funds availablewith the unit in the form of other assets.

In order to prevent the access to the capital markets by the willful defaulters, a copyof the list of willful defaulters (non-suit filed accounts) and list of willful defaulters (suit-filed accounts) are forwarded to SEBI by RBI and Credit Information Bureau (India) Ltd.(CIBIL) respectively.

The Reserve Bank of India periodically releases the lists of Suit Filed Accounts andWillful Defaulters These are available on the Reserve Bank of India website on a specialURL: defaultersrbi.org.in.

Checklist

(a) Check that the name of the Company or its Director(s) does not appear in theDefaulters list of Reserve Bank of India;

(b) Check whether the company has/has not entered into any One Time Settlement(OTS) arrangement with any FI/Bank(s) during the period to which the Reportpertains.

Answer 4(c)

Sections 77 to 87 made under chapter VI of the Companies Act, 2013 provide for theregistration of charges in so far as any security on the company's property or undertakingis created, modified or satisfied thereby.

Section 77(1) of the Companies Act, 2013 provides that it shall be the duty of everycompany creating a charge within or outside India, on its property or assets or any of itsundertakings, whether tangible or otherwise, and situated in or outside India, to registerthe particulars of the charge signed by the company and the charge-holder together withthe instruments, if any, creating or modifying such charge in E-Form CHG-1 (for otherthan debentures) or E-Form CHG-9 (for debentures including rectification), on paymentof such fees and in such manner as may be prescribed in the Rules, with the Registrarwithin 30 days of from the date of creation/ modification of charge.


Provided that the Registrar may, on an application by the company, allow suchregistration to be made:

(a) in case of charges created before the commencement of the Companies(Amendment) Ordinance, 2019, within a period of three hundred days of suchcreation; or

(b) in case of charges created on or after the commencement of the Companies(Amendment) Ordinance, 2019, within a period of sixty days of such creation,on payment of such additional fees as may be prescribed.

Provided further that if the registration is not made within the period specified:

(a) in clause (a) to the first proviso, of Section 77 of the Companies Act, 2013 theregistration of the charge shall be made within six months from the date ofcommencement of the Companies (Amendment) Ordinance, 2019, on paymentof such additional fees as may be prescribed and different fees may be prescribedfor different classes of companies;

(b) in clause (b) to the first proviso, of Section 77 of the Companies Act, 2013, theRegistrar may, on an application, allow such registration to be made within afurther period of sixty days after payment of such ad-valorem fees as may beprescribed.

As per Sub-rule (3) of Rule (3) of the Companies (Registration of Charges) Rules,2014, where the company fails to register the charge in accordance with Sub-rule (1) ofRule (3) of The Companies (Registration of Charges) Rules, 2014, with in the periodspecified in section 77 on payment of additional fee or advalorem fees as prescribed inthe Companies (Registration office and fees) Rules, 2014.

Where a charge is registered with the Registrar under sub-section (1) of Section 77of the Companies Act, 2013, he shall issue a certificate of registration of such charge insuch form and in such manner as may be prescribed to the company and, as the casemay be, to the person in whose favor the charge is created.

Question 5

(a) Write short notes on the following :

(i) Scope of legal due diligence.

(ii) Risks associated with non-compliance of law.

(iii) Justification for environmental due diligence. (3 marks each)

(b) (i) Prepare a checklist for compliance with terms and conditions set forth by alending bank at the time of sanctioning a loan.

(ii) Mention description of the following forms required to be filed under theCompanies Act, 2013 :

— Form No. DPT-3— Form No. DIR-12— Form No. INC-24 (3 marks each)


Answer 5(a)(i)

The scope of legal due diligence depends on the purpose and objectives which mayvary from case to case. The scope of due diligence by a large institutional investor willvary from the scope of due diligence by the company which proposes to acquire a targetcompany. Thus it is not possible to define the scope of due diligence specifically. However,certain mandatory issues that should be covered in any type of legal due diligence are asfollows:

1. Regulatory compliance - It would include compliance requirements of the companyunder various applicable laws such as Companies Act, Income Tax Act, SEBIAct rules and regulations, employee related laws, other business related lawssuch as pollution control laws, patent laws, and applicable laws in the countrywhere the target company is situated.

2. Contractual compliance - It would include the compliance by the company undervarious material contracts by the company with suppliers, customers, employeesetc. and to verify whether the company has complied with the terms and conditionsof different contracts.

3. Compliance under intra-corporate aspects - It would include the compliance bythe company under the intra company documents such as Memorandum andArticles of Association, Corporate policies, procedures, code of conduct etc.

4. Financial aspects - It includes thorough reading of the balance sheet to identifythe financial obligations of the company, penalties paid for violations of laws inthe past etc.

5. Non-financial aspects - It includes analysis/examination of aspects such asreputation and goodwill of the company.

6. Cultural aspects - Especially in case of cross border transactions, compatibilityand adaptability of corporate cultures are to be analysed to eliminate the problemsthat may arise out of cultural differences

Answer 5(a)(ii)

The various risks that a company may be exposed due to non-compliance of thelaws are as under:

1. Cessation of business activities

2. Civil action by the authorities

3. Punitive action resulting in fines against the company/officials

4. Imprisonment of the errant officials

5. Public embarrassment

6. Damage to the reputation of the company and its employees

7. Attachment of bank accounts.


Answer 5(a)(iii)

Few reasons for performing environmental due diligence are enumerated below:

- To assess the emission of hazardous substances and mitigation measuresthrough examination of industrial sites

- To ensure Regulatory compliances and to assess the cost of non-compliancesif any

- Societal reaction to emission of effluents and its impact on the financial health ofthe company.

- To assess the overall impact on environment.

- To suggest remedial course of actions and environmental management plan

- To assess the sustainability initiatives of the company and its potential impacton the business.

- To allocate liabilities identified during the investigation, draft indemnities, orperhaps re-price the deal.

Answer 5(b)(i)

Checklist for Compliance with the terms and conditions set forth by the lendingInstitution at the time of availing the facility.

Check the following points to confirm that:

(a) Further funds have not been borrowed from bank(s)/financial institution(s) onhundis, other than from its bankers, without prior consent;

(b) No donations/contributions have been made to the charitable and other funds,which are not directly related to the business of the borrower or to the welfare ofits employees, in excess of the indenture (if any), without the consent of thebank; and

(c) No merger / consolidation / re-organization /arrangement / compromise with thecreditors / shareholders has been undertaken / permitted without the approval ofthe bank.

Answer 5(b)(ii)

From No. DPT-3 E-Form DPT-3, Return of deposits required to file with Registrarpursuant to section 73 of Companies Act, 2013 read with rule 16 ofthe Companies (Acceptance of Deposits) Rules, 2014.

From No. DIR-12 E-Form DIR-12 is to be filed for Appointment/Resignation or in caseof Change in Designation of Directors of the Company by theCompany pursuant to Sections 7(1)(c), 168 & 170 (2) of theCompanies Act, 2013 and Rule 17 of Companies (Incorporation)Rules, and Rule 8, 15 & 18 of Companies (Appointment andQualification of Directors) Rules, 2014.

From No. INC-24 Application for approval of Central Government for change of name,pursuant to Section 13(2) of the Companies Act, 2013 and Rule29(2) of the Companies (Incorporation) Rules, 2014.


Question 6

(a) Greenfield Ltd. has borrowed from Trust Bank by way of Term Loan of ̀ 40 crorefor its new hotel project with the consent of the Board. The paid up equity sharecapital and free reserves on the day of the borrowings were ̀ 10 crore and ̀ 18crore respectively. In the recent Annual General Meeting, Dey, a shareholder ofthe company raised an objection that the company has contravened the provisionsof the Companies Act, 2013 with regard to the borrowings. Is the contention ofthe shareholder correct ? Justify. Will your answer differ if the above company isa Private Company ?

(b) What are the benefits of Data Room under due diligence ?

(c) ‘‘The successful merger demands that strategic planners are sensitive to thehuman issues of the organizations’’. Discuss and mention the checks that needto be ensured in this regard. (5 marks each)

Answer 6(a)

Section 180 (1) (c) of the Companies Act, 2013 states that to borrow money, wherethe money to be borrowed together with the money already borrowed by the Company isin excess of aggregate of its paid-up share capital, free reserves and securities premium(excluding temporary loans obtained from the company's bankers in the ordinary courseof business) then, such company shall obtain the approval of the members by way ofSpecial Resolution in the General Meeting.

In the present case, the aggregate of paid-up capital and free reserves is (`10 crore+`18 Crore = ̀ 28 Crore) and Greenfield has borrowed ̀ 40 Crore with the consent of theBoard only.

Thus, the contention of Mr. Dey is correct, as the Company has not obtained theapproval of the Members in General Meeting by way of a Special Resolution for `40Crore, which exceeds ̀ 28 Crore.

In case the Company being a Private Company, then the Company has compliedwith the provisions of the Companies Act, 2013 as Section 180 shall not be applicable toPrivate Companies as per exemption notification of June 2015.

Answer 6(b)

The benefits that may accrue from the Data Room are as under:

• Provides material information that helps in analysing the health status of thecompany and also doing a SWOT analysis.

• Provides clarity in the minds of the buyer with regard to the business and thefinancial models of the company, of their present operations and also about theexisting profitability, growth prospects and the sustainability of the businessthat is proposed to be bought, which is under review.

• It helps for a better bargaining power for the buyer through the analysis of variousdata and information that may be gathered during due diligence.

• The exercise shall highlight the various transactions which may be abnormal or


have weakness or limitations in current business strategy which the seller maynot disclose directly to the buyer or so.

• It highlights the strong points of the business and ethics of the seller, whereinthe numerous data and information collated at the time due diligence shall helpfor better Valuation of Business which shall be useful for both the Buyer andSeller.

Answer 6(c)

The successful merger demands that strategic planners are sensitive to the humanissues of the organisations.

For the purpose, following checks have to be made constantly to ensure that:

- sensitive areas of the company are pinpointed and personnel in these sectionsare carefully monitored;

- serious efforts are made to retain key people;

- a replacement policy is prepared to cope with inevitable personnel loss;

- employees are informed of what is going on in the organization i.e. even badnews is delivered systematically. Uncertainty is more dangerous than the clear,and logical presentation of unpleasant facts;

- training department is fully geared up to provide short, medium and long termtraining to both production and managerial staff;

- likely union reaction be assessed in advance;

- estimate cost of redundancy payments, early pensions and the like assets;

- comprehensive policies and procedures be maintained for employee relatedissues such as office procedures, new reporting, compensation, recruitmentand selection, performance, termination, disciplinary action etc.;

- new policies to be clearly communicated to the employees especially employeesat the level of managers and supervisors Further line manager, to be briefedabout the new responsibilities of those reporting to them;

- family gatherings and picnics be organised for the employees and their familiesof merging companies during the transition period to allow them to overcometheir inhibitions and breed familiarity.

***

53 PP–CRVI–December 2019

CORPORATE RESTRUCTURING, VALUATIONAND INSOLVENCY


NOTE : 1. Answer ALL Questions.

2. All references to sections relate to the Companies Act, 2013 unless statedotherwise.

53

PART A

Question 1

(a) “Smaller is manageable but Bigger is Beautiful” are not the only reasons forindulging Corporate Restructuring exercise by the Management in managing theestablishments. Elucidate the statement indicating need, scope and modes ofcorporate restructuring. (5 marks)

(b) ABC Ltd. intends to delist its shares from Delhi Stock Exchange for which thecompany has made required public announcement. Surewin Ltd., substantialshareholder in the said Company, made a counter offer. Apprise the Board witha short note regarding the outcome. (5 marks)

(c) “Dissatisfactory implementation of sanctioned compromise and arrangementfor amalgamation or merger may lead to liquidation.” Examine the statement inrelation to powers of Tribunal in terms of Companies Act, 2013. (5 marks)

(d) “Non-compliance or contravention of the requirements prescribed under theCompanies Act, 2013 and rules framed thereunder in framing or implementingthe scheme of a compromise, arrangement involving transferor and transfereeCompanies may lead to prosecution.” Briefly explain. (5 marks)

Answer 1(a)

In every corporate restructuring exercise, the aim is to eliminate disadvantages andto combine advantages. The various needs for undertaking a Corporate Restructuringexercise are as follows:

(i) to focus on core strengths, operational synergy and efficient allocation ofmanagerial capabilities and infrastructure.

(ii) consolidation and economies of scale by expansion and diversion to exploitextended domestic and global markets.

(iii) revival and rehabilitation of a sick unit by adjusting losses of the sick unit withprofits of a healthy company.

(iv) acquiring constant supply of raw materials and access to scientific researchand technological developments.

(v) capital restructuring by appropriate mix of loan and equity funds to reduce thecost of servicing and improve return on capital employed.

PP–CRVI–December 2019 54

(vi) improve corporate performance to bring it at par with competitors by adoptingthe radical changes brought out by information technology.

One of the modes is to amalgamate the units in order to get the advantage of abigger and useful organization. On the other hand, to get rid of demerits ofmanageability, demerger is resorted to. Thus, mergers, demergers, reversemergers, takeovers, joint ventures, strategic alliances, franchising, slump saleare the different strategies that forms part of corporate restructuring. Further,various aspects are to be examined such as valuation, funding, legal, procedural,taxation, stamp duty, accounting, competition as well as human and culturalsynergies while under taking corporate restructuring.

Answer 1(b)

For the purpose of delisting of shares in a stock exchange the provisions of Securitiesand Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 need to becomplied with. In the public announcement made pursuant to regulations 3, 4 or 5 of theSecurities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers)Regulations, 2011, the acquirer need to publish intention of delisting.

In case approval of shareholders could not be obtained for delisting or offer for saleis not accepted by the shareholders as per the threshold limits under Regulation 17 ofthe Delisting Regulations or the acquirer rejected the discovered price – such failuresneed to be publicly announced by the acquirer. In case any counter offer is made, theacquirer is not entitled to delist and not liable to pay any interest for delay due to counteroffer but is required to make a public announcement in newspapers within 2 workingdays.

Answer 1(c)

Mergers and amalgamations are not defined under the Companies Act, 2013, butthe schemes submitted are in the nature of compromise and arrangement. Section231(1) of the Act empowers the Tribunal to supervise the implementation of any suchscheme of compromise or arrangement. The Tribunal may at the time of order or at anytime, thereafter, may give such directions in regard to any matter, or make suchmodifications in the compromise or arrangement as it may consider necessary, for theproper implementation of the compromise or arrangement.

On the other hand, if the Tribunal finds to its satisfaction that the scheme could notbe implemented even with modifications and the company is unable to pay its debts, theTribunal may order winding-up of such company. Thus, dissatisfactory implementationof any scheme of compromise or arrangement may lead to the winding-up or liquidationand such an order shall be deemed to be an order made under section 273 of CompaniesAct, 2013.

Answer 1(d)

In terms of section 232(8) of the Companies Act, 2013, if a transferor company or atransferee company contravenes the provisions of this section, the transferor companyor the transferee company, as the case may be, shall be punishable with fine whichshall not be less than rupees one lakh but which may extend to rupees twenty-five lakhand every officer of such transferor or transferee company who is in default, shall be


punishable with imprisonment for a term which may extend to one year or with fine whichshall not be less than rupees one lakh, but which may extend to three lakh rupees, orwith both.

Hence, a meticulous compliance needs to be undertaken in any proposal for ascheme of merger or amalgamation.


Question 2

(a) Internal accruals accumulate to reserves prompts management to venture moreavenues through acquisitions or mergers but during and after the process, fundsavailable internally are inadequate. Suggest available avenues to fund the bidsfor Takeovers and Mergers in addition to internal accruals. (5 marks)

(b) Persuasion Performers Ltd. has defaulted in payment of certain instalments ofBank Loan during the year 2012. On 17th October, 2016, Board passed aresolution to convene a general meeting to pass a resolution authorising Boardto buy-back its shares to the extent not more than 20% of paid up capital andreserves. It is noted by the Board that the default to Bank was accidental andthat has been made good by July 2013. The Extra-ordinary General Meetinghas been scheduled for Friday 18th November, 2016. Can you help the Boardas to legality of the proposal stating any other aspect to be looked, that prohibitsbuy-back of securities ? (5 marks)

(c) “Contracts entered into and in force need to be replaced by fresh contracts aftermerged or takeovers entities that have been integrated pursuant orders passedby Courts or Tribunals.” Do you agree ? (5 marks)


Question 2A

(i) “Fairness, reasonableness and made in Good Faith are the premises on whichthe Judicial Authority approves any scheme for amalgamation, merger ordemerger.” Offer your comments supported by any judicial pronouncements.

(ii) Threshold limits triggering public announcement for acquiring shares in listedpublic Companies are not applicable in case of a listed company undergoingCorporate Insolvency Resolution Process (CIRP) in terms of Insolvency andBankruptcy Code 2016 — explain indicating the threshold limits that can beignored in case of CIRP ?

(iii) “Advocate may accompany a person summoned by the Director General ininvestigation under Competition Act, 2002.” Briefly offer comments.

(5 marks each)Answer 2(a)

Several modes are available to fund the mergers and takeovers, especially for anentity that has built-up balance sheet of robust financials. Further issue may be throughequity shares either as rights, preferential or with differential rights. Cost of such fundsis not fixed because more the revenue, more dividend can be given to shareholders.


Funds can also be borrowed by issuing instruments such as bonds and debentures.However, bond holders and debenture holders need to be paid coupon rates that ischarged to revenue account. Further, borrowings can be made from banks and financialinstitutions that have fixed tenure. Merit of such funds coming under project finance isevaluated by banks or financial institution before extending finance. At the same time,one should also note that adoption of such process, in some cases, is an uninvitedinterference to dilute the management.In addition, default in payment of interest orinstalment triggers the borrower as non-performing asset, which invites a case to betaken for insolvency under Insolvency and Bankruptcy Code, 2016.

The Company may borrow funds through the deposits from its directors, their relatives,business associates, shareholders and from public in the form of fixed deposits, externalcommercial borrowings (ECB) , issue of securities, loans from Central or State financialinstitutions, banks, rehabilitation finance, etc..

Answer 2(b)

Any default in payment of term loan, public deposits, and debentures becomes ahurdle in buy-back of securities. However, in the instant case, the default is remediedprior to 3 years of the proposal as stated in proviso to section 70(1)(c) of the CompaniesAct, 2013. Buy-back is also prohibited if done through any subsidiary or further subsidiariesdown the line, through any sole or group investment companies and/or if there arefailures in compliance of section 92 (annual return), sections 123 or 127 (distribution ofdividends) or section 129 (financial statements) of the Companies Act, 2013.

In the given case the Company has default of payment of certain installments of theBank was made good by July, 2013, and three (3) years has been passed before thepassing of resolution by Board, So Company can go ahead for the Buy-back proposal.

Further, it is necessary to ensure debt to equity ratio is at least 1:2 post buy-backand shares ascribed for buy-back are fully paid-up. Process of buy-back need to becompleted within 12 months of authorization. Shares bought back need to be destroyedwithin seven days of the last date of completion of buy-back.

Answer 2(c)

Legally speaking, orders of Court or Tribunal sanctioning scheme prevails and shallensure that the contracts entered by the merging entity shall continue to be transferredin the name of merged entity from relevant date. However, other issues in the contractswith a third party may require company to inform about merger or may give rise to otherparty to terminate the contract. Normally lease agreements, that contain fixed tenuremay release the landlord from such restriction in the event of restructure of lesseeentity.

Further, the merged entity would need to check various rights and obligations speltout in the contracts with third parties and should allocate teams to identify and ensurecompliance of those requirements. In short, all existing contracts with its terms needrevisit.

Answer 2A(i)

Any scheme which is fair, reasonable and made in good faith will be sanctioned if itcould reasonably be supported by sensible people to be for the benefit to each class of


the members or creditors concerned. In Sussex Brick Co. Ltd., Re, (1960) 1 All ER 772:(1960) 30 Com Cases 536 (CH D) it was held, inter alia, that although it might be possibleto find faults in a scheme that would not be sufficient ground to reject it.

It was further held that in order to merit rejection, a scheme must be obviouslyunfair, patently unfair, unfair to the meanest intelligence. It cannot be said that no schemecan be effective to bind a dissenting shareholder unless it complies with the basicrequirements to the extent of 100 per cent. It is the consistent view of the Courts that noscheme can be said to be fool-proof and it is the possible to find fault in a particularscheme but that by itself is not enough to warrant a dismissal.

Answer 2A(ii)

Regulation 3 of Securities and Exchange Board of India (Substantial Acquisition ofShares and Takeover) Regulations, 2011 requires public announcement of making anopen offer to acquire further shares if the acquirer along with ‘persons acting in concert’hold less than 25% shares but, desires to acquire exceeding 25% shares by suchfurther acquisition. In case, if already holding above 25% shares, any further acquisitionabove 5% in a financial year also requires public announcement.

However, the aforesaid threshold limits are of shares not applicable in terms ofSecurities and Exchange Board of India (Substantial Acquisition and Takeover)(Amendment) Regulation, 2018. As per the said amendment an explanation is addedstating that any acquisition pursuant to a Resolution Plan approved under Section 31 ofthe Insolvency and Bankruptcy Code, 2016 is exempted, from the above mentionedcompliances.

However, for indirect acquisition of shares or control (under Regulation 5 of SEBI(SAST) Regulations, 2011), where the ‘target company’ is to be controlled by ‘personsacting in concert’, the obligation for public announcement of an open offer gets attracted.

Answer 2A(iii)

As per the Competition Commission of India (General) Amendment Regulation, 2018an advocate is authorized to accompany the person summoned by the Director Generalin investigation under the Competition Act, 2002. As per Regulation 46A, however, thereare certain conditions. Such Advocate is not permitted unless a prior request in writingtogether with vakalatnama or power of attorney is made. He will not sit in front of thesummoned person. During Examination on oath, he shall neither be in a hearing distancenor shall interact, consult, confer. There shall not be any misconduct on the part of suchadvocate. In case of any misconduct, if directed by the Commission, complaint may beforwarded to Bar Council of the concerned State, wherein the Advocate is a member.

Question 3

(a) “Orders sanctioning amalgamation or absorption are covered by the Indian StampAct as if it were a Conveyance Deed.” Justify the statement with judicial pronounce-ments.

(b) In cases of takeovers or demergers, dissenting shareholders have a right tovoice a grievance — enumerate briefly the procedure.

(c) Rama Khadi Industries Ltd. is a fully owned subsidiary of Karishma Gramudyog


Ltd. a State Government Company. The State Govt. took a policy decision toamalgamate the former with the latter. Illustrate briefly the steps to be taken inthe matter.

(d) Several Credits Finance Company Ltd., a Non-Banking organisation is in thediscussion for a merger with Hatak Bank Ltd., a scheduled Bank. Recommendthe action points briefly.

(e) Saravana Synthetics Ltd. passed a resolution for reduction of capital that hasbeen approved by the Tribunal. Being aggrieved on the valuation processemployed Mr. Suman, a shareholder, holding about 4% of total capital, appealedagainst the said order. Will he be successful ? (3 marks each)

Answer 3(a)

‘Conveyance’ as is defined under section 2(10) of the Indian Stamp Act, 1899 refersto any instrument by which any moveable or immovable property is transferred intervivos. Section 2(g)(iv) of the Bombay Stamp Act, 1958 specifically included ordersunder section 394 of Companies Act, 1956 that relates to amalgamation and absorption.

The landmark decision of Bombay High Court in Li Taka Pharmaceuticals v. Stateof Maharashtra (1996) 8 SC 102 (Bom.) has serious implications for mergers coverednot just by the Bombay Stamp Act, 1958 but also mergers covered by Acts of otherStates. The following are the major conclusions of the Hon’ble Court:

(1) An amalgamation under an order of Court under Section 394 of the CompaniesAct, 1956 is an instrument under the Bombay Stamp Act, 1958.

(2) States are well within their jurisdiction when they levy stamp duty on instrumentof amalgamation.

(3) Stamp duty would be levied not on the gross assets transferred but on the“undertaking”, when the transfer is on a going concern basis, i.e. on the assetsless liabilities. The value for this purpose would thus be the value of sharesallotted. This decision has been accepted in the Act and now stamp duty isleviable on the value of shares allotted plus other consideration paid.

Calcutta High Court has held in Emami Biotech Ltd (2012) with a similar view.

Answer 3(b)

As per section 235 of the Companies Act, 2013, the dissenting shareholders havebeen put at the limit of 10% of the value of the shares of the company. In case of listedcompanies, SEBI takes cognizance of even a single shareholder to initiate investigationfor remedial action under SEBI (SAST) Regulations, 2011. In case of all companies, ifpromoters resort to take over under section 235 of the Companies Act, 2013, a transfereecompany, which has acquired 90% shares of a transferor company, through a schemeor contract, is entitled to acquire shares of remaining 10% shareholders.

Dissenting shareholders have been provided with an opportunity to approach Tribunal.If the price fixed is not acceptable, even a single shareholder can approach NationalCompany Law Tribunal to seek clarification and justice.

Answer 3(c)


In respect of compromise, arrangement or amalgamation of Government companies,it is not the Tribunal but the Central Government that approves such schemes. UnlikeCompanies Act, 1956, wherein approval by Central Government was pursuant to Section621A of the said Act. Notification of Section 233 of the Companies Act, 2013 specifiesthe procedure for amalgamation etc. of certain companies that include Governmentcompanies. Section 233 has been made effective since December 2016 and relevantRule 25 of Companies (Compromise, Arrangements and Amalgamations) Rule, 2016.Government has not come out with any new policy as stated under Section 237, henceexisting policy prevails.

Answer 3(d)

In cases of scheme of merger by the Non-Banking Financial Company, approvalneeds to be obtained from National Company Law Tribunal, whereas the scheme byBanks need to obtain approval from Reserve Bank of India in accordance with theMaster Directions by RBI, the banking Company need to ensure:

(a) The NBFC has not violated any RBI/SEBI norms;

(b) The NBFC complied with KYC of all its accounts holders;

(c) If it is found that the NBFC has any credit facilities from banks or financialinstitutions, whether the loan agreement mandate the NBFC to seek consent ofthe lending bank/financial institution for merger/amalgamation.

As per paragraph 17 of the Master Direction, to enable the Reserve Bank of India toconsider the application for approval, the banking company shall furnish to the ReserveBank of India, information as specified in the schedule to the direction (except certificatein respect of names of shareholders who gave notice in writing at or prior to the meetingto the NBFC that they dissented from the scheme of amalgamation) and also theinformation and documents relating to the valuation along with its computation and thequoted price details.

Answer 3(e)

Mr. Suman shall not be successful.

Resolution for reduction of capital is approved with requisite majority. Tribunal passedorder of approval with proper reasoning. It was held in the matter of Chander BhanGandhi v. Reckit Benckiser (India) Ltd. [2012] 107 CLA 511 (Del) that in the absence ofany fault in the reasoning of the Single Judge approving the reduction of capital, valuationof shares, the appeal by a sole shareholder is rejected. Merely determination of value ofshares by some other method having a different conclusion is not a ground for appeal.[Wartsila India Ltd v. Janak Mathuradas and other [2010] 99 CLA 463 (Bom)]

PART B

Question 4

(a) “Fair Value of shares is in fact not fair but a compromise effort for bringing theparties to an agreement, just like sudden death in Hockey or Football”. Justifywith your views. (5 marks)


(b) Management of a Company seeks your advice whether to go for sales in anearby foreign country. They have furnished the following historical data :Units — 4,200, Wages — ̀ 12,600, Materials — ̀ 21,000, Fixed cost — ̀ 7,000,Variable cost — `2,100, Total — ` 42,700. Selling price in domestic market is`15. In the foreign land about 800 units may be sold only at ̀ 10 and additional25 paise per unit will be expenses as freight etc. What would be your advice ?

(5 marks)(c) Makeover More-growth Financials Ltd. is in the process of making Further Public

Offer (FPO). Can you advise the Board on the precautions to be taken in fixingthe price and price-band for the proposed FPO ? (5 marks)

Answer 4(a)

Valuation is a complex task that requires several inputs not only tangible but alsointangible data. There cannot be any method or formula to calculate fair value though itis possible to calculate book value, market value averaging quoted prices for certainperiod. However, efforts are made to ascertain fair value just like extension of play timein Hockey or Football in case of tie even in extra time. Resort to such valuation is donein case market value is independent of its profitability. Dividing the aggregate of valuesobtained through net assets method and yield method is the process to arrive at fairvalue. In another way the following well-known methods are applied to get fair value:

(a) The manageable profits basis method or the earning per share method;

(b) The net worth method or the break-up value method; and

(c) The market value method.

In nutshell, the methods most suitable to arrive at a reasonably fair conclusion isattempted.

Answer 4(b)

Before affording advice, we may compute the following:

Domestic Foreign Total(4200 Units) (800 Units) (5000 Units)

Sales (Units x Price) (A) 63,000 8,000 71,000

Material (Rs.5 per unit) Rs.21,000 Rs.4,000 Rs.25,000

Wages (Rs.3 per unit) Rs.12,600 Rs.2,400 Rs.15,000

Variables (Rs.0.50 per unit ) Rs.2,100 Rs.400 Rs.2,500

Freight (Rs.0.25 per unit forforeign market) --- Rs.200 Rs.200

Marginal Cost (B) Rs.35,700 Rs.7,000 Rs.42,700

Contribution (A - B) Rs.27,300 Rs.1,000 Rs.28,300

Less Fixed Cost Rs.7,000 --- Rs.7,000

Overall Profit Rs.20,300 Rs.1,000 Rs.21,300


From the above calculation, it can be concluded that accessing the foreign marketenhances the overall profit to the Management.

Answer 4(c)

Board needs to be advised on the following precautions in fixing price or price band:

(a) In case of book building process, floor price or price band need to be stated in ared-herring prospectus and to determine later the price, before filing with ROC;

(b) Announce the price or price band at least five working days before opening thebid in case of IPO but in case of FPO at least one working day in all newspapersin which pre-issue advertisements got released as well as websites of stockexchanges in which listed;

(c) Announcements to specify financial ratios computed for upper and lower priceband;

(d) The cap on price band shall be less than or equal to 120% of the floor price;

(e) The floor price or the final price shall not be less than the face value of specifiedsecurities involved in the Further Public Offer.

Question 5

(a) Paramhans Pharmaceuticals Ltd. is a listed company but the managementdecided to get the shares in the Company delisted from the stock exchange.The Directors desire to seek advice how to fix offer price. In the meantimeCorporate Insolvency Resolution Process (CIRP) is initiated and a ResolutionPlan has been resolved by the Committee of Creditors and awaiting approval ofthe Adjudicating Authority — Offer your advice. (5 marks)

(b) Brands build benefits of future business-inspect the statement with a view todwell upon the importance of Brand valuation. (5 marks)

(c) “In comparison to demerger, slump sale is not generally tax efficient.” Commentbriefly with any case that had taken place. (5 marks)

Answer 5(a)

The problem stated in question has two scenarios – one is when the company is nota defaulter as per Insolvency and Bankruptcy Code, 2016 and the other is when it is inthe Corporate Insolvency Resolution Process (CIRP). In case of former, offer price isdetermined through book building as per Securities Exchange Board of India (Delistingof Equity Shares) Regulations, 2009.

Final offer price shall be the price at which the maximum number of shares aretendered by equity holders. In case of latter, regulations were amended in 2018, theprice shall be as per Tribunal approved Resolution Plan subject to that the price shall notbe less than the liquidation value as determined by the Registered Valuer.

Answer 5(b)

Branding a product involves ascertaining product sustainability in the market. Inorder to protect the brands registration is done under several classes as per Trade


Marks Law. For a moment, think as to how much investment one has to make by meansof money and other resources to adopt, develop and popularize a brand or a mark duringthe course of one’s business. They create a value premium for the products and otherservices. Without a brand or mark, products and services are ‘address less’. Brandsconnect markets with products and services and thereby they create value. Brands donot command any value unless they are able to bring cash flows to the company thathas adopted the same. With increase in incremental cash flows, value of brand increasesproportionately. Brands have to be constantly associated with good quality productsand services. They require proper showcasing and servicing and they should remainactive in appropriate markets.

Answer 5(c)

The statement is true since any undertaking being transferred, if held for more than3 years prior to the date of the slump sale, the gains from such a sale would qualify aslong-term capital gains, and the effective rate of tax would be 20%. If the undertakinghad been held for 3 years or any period lesser than that, prior to the date of slump sale,then the income would be taxable as short-term capital gains, the effective rate of whichis currently 30%. Also, any distribution by the company to its shareholders could attractdividend distribution tax. This did not however, prevent the acquisition of FormulationBusiness from Piramal Health Care Ltd. by Abbott Healthcare Private Limited in 2010.

PART C


Question 6

(a) “Default by Debtor was a crime punishable with imprisonment or death” —forgotten preception in the Law of Bankruptcy, transformed the phrase by givingopportunity to a Bankrupt or Insolvent for revival — express your views onevolution of Insolvency Law in Britain and U.S.A. ?

(b) Progress of enforcement of Insolvency and Bankruptcy Code, 2016 depends onfour pillars apart from the Adjudicating Authorities — briefly state the role ofsuch pillars.

(c) Samadhan Assets Management Company Ltd. is an Asset ReconstructionCompany duly registered by the Reserve Bank in India. However, registration ofthe AMC is cancelled. The directors of the Co. seek your advice on their rightsand obligations.

(d) Perfect Polyesters Ltd. is undergoing Corporate Insolvency Resolution Processas per Insolvency and Bankruptcy Code, 2016. Committee of Creditors isconstituted. In the meantime, a Corporate Debtor — Perfect Polyesters Ltd.made a settlement with the applicant financial creditor and desires to get theapplication withdrawn and seeks your advice. (5 marks each)


Question 6A

(i) In the “Resolution Process”, define the functions of Insolvency Professionals.Is their contribution being noticed ?


(ii) UNICITRAL Model Law is binding on member countries but at the best obiterdicta for Courts of the Member Countries’ dealing in disputes relating to CrossBorder Insolvency and International Trade — elucidate.

(iii) “Appointment of Voluntary Liquidator does not require approval of Tribunal butCompany can be dissolved on the orders of National Company Law Tribunal.”Discuss the above in the background of initiation of voluntary liquidation andconsequent dissolution of a company.

(iv) “Banks and Financial Institutions do have a free hand to take possession ofassets of a defaulting debtor under Securities and Reconstruction of FinancialAssets and Enforcement of Security Interest Act, 2002.” Are there any exceptionsunder that Act ? (5 marks each)

Answer 6(a)

The statement today is a forgotten perception. First Bankruptcy Law enacted inEngland in 1542 wherein debtor was looked upon as if an offender, and the Law wasmainly for the benefit of creditors. The erstwhile law was providing equal distribution ofdebtor’s assets among creditors yet not relieving the debtor from punishment. However,at present, UK Insolvency Act, 1986 is prevalent to deal with insolvencies of individualsand companies. Opportunity is given to revive the company to emulate the ‘rescue’culture that characterised the Corporate Sector in U.S.A.

Early bankruptcy laws in USA were draconian as were in England. Bankruptcy AbusePrevention & Consumer Protection Act, 2005 in USA attempts to overhaul earlier Codeswith specific reference to consumer protection, restoring personal responsibilities andintegrity in the Bankruptcy system.

In USA, Chapter 11 bankruptcy proceedings are considered as re-organisation/resurrection process for corporates. Companies, while remaining operational, are permittedto restructure their debt obligations.

In India also with promulgation of Insolvency and Bankruptcy Code, 2016, debtor isgiven revival opportunity before liquidation.

Answer 6(b)

Insolvency and Bankruptcy Board of India (IBBI), Insolvency Professional Agencies(IPA), Insolvency Professionals (IP) and Information Utilities (IU) are the four pillars forthe progress and implementation of Insolvency and Bankruptcy Code, 2016. AdjudicatingAuthorities are National Company Law Tribunal (NCLT) in case of Companies and LimitedLiability Partnerships and Debt Recovery Tribunal (DRT) in case of Individuals andPartnerships firms.

IBBI functions with a Chairman, 3 Central Government Officials, 1 RBI ex-officioand five members including 3 whole-time members as nominated by Central Government.IBBI is entrusted with framing regulations for Insolvency and Bankruptcy matters, settingeligibility and registering intermediaries i.e. IPA, IP and IU as well as monitoring thoseintermediaries.

IPAs are registered bodies to enrol Insolvency Professionals (IPs) before registrationwith IBBI. IP is entrusted with Corporate Debtor to frame Resolution Plan for revival


through Committee of Creditors. IU is to keep records of liabilities relating to debtors,creditors electronically.

Answer 6(c)

On receiving the communication from Reserve Bank of India as to cancellation ofRegistration, the Asset Reconstruction Company (ARC), if aggrieved may appeal toCentral Government within thirty days of receipt of any such order. However, the saidcompany has obligation to repay the entire investments held by it together with interest.Till such time it will be deemed to be recognised as a Reconstruction Company for theinvestments held by it on behalf of qualified buyers. Repayment needs to be madewithin such period as may be permitted by the Reserve Bank of India in the ‘Order ofCancellation’ of registration.

Answer 6(d)

Prior to the amendment made in 2018 in the Insolvency and Bankruptcy Code,2016, there was no provision for withdrawal of Corporate Insolvency Resolution Process(CIRP) once the Adjudicating Authority admits the application. Section 12A of the Codehas been inserted as per Insolvency and Bankruptcy Code (Second Amendment) Act,2018 enabling the Adjudicating Authority to permit withdrawal if consented by ninety percent voting share of Committee of Creditors. Procedure is to be followed in terms ofRegulation 30A of Insolvency and Bankruptcy Board of India (Insolvency ResolutionProcess for Corporate Persons) Regulations, 2016. Thereafter, the Corporate Debtormakes an application in Form FA to Resolution Professional and a Bank Guarantee forconsideration by Committee of Creditors within 7 days and subsequently to Tribunal forapproval.

Answer 6A(i)

Under Section 3(19) of Insolvency and Bankruptcy Code, 2016, InsolvencyProfessional (IP) means a person enrolled under Section 206 of the Code with anInsolvency Professional Agency as its member and registered with the IBBI under section207 of the Code. The Code provides for IP as intermediaries who would play a key rolein the efficient working of the insolvency and bankruptcy process.

The functions performed by Insolvency Professionals are:

i) Conducting Resolution Process;

ii) Conducting Meeting of Creditors;

iii) Management of operations of corporate debtor as going concern;

iv) Preparation of Information Memorandum;

v) Submission of resolution plan; and

vi) Conducting of Liquidation process under the order of Adjudicating Authority ifthe resolution plan is not accepted or approved, etc.

The contribution of IPs has become significant and Professional Bodies are impartingTraining such that more IPs come to this profession. The contribution has just beeninitiated, but the role shall be greater and more prominent in future for IPs.


Answer 6(A)(ii)

Obiter dicta refers to opinion expressed in a court by the Judge but not essential tothe decision and hence is not binding. Thus the statement emphasizes to adopt the lawas legislation in member countries but not binding on courts unless incorporated in alegislation. Framing of UNCITRAL Model Law is necessitated due to:

a) Global expansion of trade and investment;

b) Inadequate and inharmonious legal approaches due to difference in regulatoryplatform across countries that hampers the rescue of financially troubledbusinesses and impede the protection of the assets of the insolvent debtoragainst dissipation;

c) Increasing incidences of cross border insolvency due to integration of tradeacross countries;

d) National insolvency laws of different countries have by and large not kept pacewith the trend.

Main thrust of the Model Law is to achieve fair and efficient administration of crossborder insolvencies protecting the interest of every stakeholder.

Answer 6(A)(iii)

Provisions relating to voluntary liquidation are contained in section 59 of theInsolvency and Bankruptcy Code, 2016 and IBBI (Voluntary Liquidation Process)Regulations, 2017 that have come into effect on 1st April, 2017. The relevant sectionsof the Companies Act, 2013 relating to members or creditors winding-up has been deletedsince then.

A resolution passed by special majority appointing none other than an InsolvencyProfessional as voluntary liquidator begins the initiation. Directors need to file a declarationof solvency at least 30 days prior to passing the resolution. In case there remains anycreditors, 2/3rds in value of creditors should approve the resolution passed earlier withinnext 7 days. The resolutions need to be filed within next 7 days with ROC. The InsolvencyProfessional needs to be independent of corporate debtor. After realization and distribution,the voluntary liquidator files report before the Tribunal as per section 59(8) of the Codefor dissolution.

Answer 6(A)(iv)

It is true that there are certain exceptions. Section 31 of the SARFAESI Act, 2002specifies that none of the provisions will be applicable in the following instances:

(a) a lien on any goods, money or security given by or under the Indian ContractAct, 1872 or the Sale of Goods Act, 1930 or any other law for the time being inforce;

(b) a pledge of movables within the meaning of section 172 of the Indian ContractAct, 1872;

(c) creation of any security in any aircraft as defined in clause (1) of section 2 of theAircraft Act, 1934;


(d) creation of security interest in any vessel as defined in clause (55) of section 3of the Merchant Shipping Act, 1958;

(e) any rights of an unpaid seller under section 47 of the Sale of Goods Act, 1930;

(f) any properties not liable to attachment (excluding the properties specificallycharged with the debt recoverable under this Act) or sale under the first provisoto sub-section (1) of section 60 of the Code of Civil Procedure, 1908;

(g) any security interest for securing repayment of any financial asset not exceedingone lakh rupees;

(h) any security interest created in agricultural land;

(i) any case in which the amount due is less than twenty percent of the principalamount and interest thereon.

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